When Expertise Isn't Enough: Rethinking audit committee oversight

A/Prof Gladys Lee, 2026

Purpose

The study was designed to advance understanding of how audit committees affect the effectiveness of internal whistleblowing systems, a cornerstone of responsible corporate governance. While policymakers recommend that audit committees comprise financial experts, Gladys Lee's study was motivated by cognitive psychology research suggesting that expertise can breed overconfidence, and examines whether equity incentives could act as a trigger for this bias. The aim was to investigate whether financial expertise, when combined with more equity compensation, could undermine rather than improve audit committees' oversight of employee whistleblowing.

Practice

The study used an archival dataset based on U.S. publicly listed firms from 2004 to 2021. Audit committee characteristics, including financial expertise and equity compensation, were obtained from BoardEx. Data on employee external whistleblowing events were obtained from the Occupational Safety and Health Administration (OSHA), focusing on those relating to financial misconduct – complaints where employees first raised concerns internally but subsequently escalated them externally, alleging retaliation. Drawing on theories of motivated reasoning and overconfidence, the analyses tested how audit committee financial expertise and equity compensation affected employee external whistleblowing.

Output

The results found that audit committee financial expertise reduced employee external whistleblowing when equity compensation was low, but increased it when equity compensation was high, suggesting a deterioration in audit committee oversight effectiveness. Additional analyses showed the effect was strongest in settings where overconfidence is theoretically more likely to arise: audit committees with less experience, more non-accounting experts, higher personal share ownership, and weaker external accountability pressures. The study is published as: Lee, G. (2025). Audit committee financial expertise, equity compensation and employee whistleblowing. Accounting, Organizations and Society, 115, 101609.

Outcome

The research provides regulators and organisations with a more nuanced basis for designing effective audit committee governance. Rather than viewing financial expertise as an unconditional safeguard, the findings demonstrate that its effectiveness depends on how directors are incentivised – encouraging remuneration committees to design audit committee compensation more carefully, recognising that excessive equity incentives may inadvertently weaken oversight of employee-raised concerns. For audit committee members, the study highlights the importance of remaining alert to potential judgment biases when evaluating whistleblowing reports.

Impact

The study advances broader debates on responsible corporate governance by challenging the conventional wisdom that “more expertise is always better,” showing instead that cognitive biases can offset the benefits of expertise. By demonstrating that the governance effectiveness of audit committee expertise also depends on incentives, the research contributes to evidence-based discussions on board composition and remuneration, strengthening understanding of how effective governance design supports responsible business and corporate accountability.