Audit committee effectiveness characteristics and auditor switches involving industry specialists

Ankita Singhvi,Nancy Chun Feng

doi:10.22495/cocv18i3art5

Ankita Singhvi, Nancy Chun Feng

Open Access

https://doi.org/10.22495/cocv18i3art5

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Abstract

The aim of this study is to investigate the association between audit committee effectiveness characteristics and auditor switches to or from an industry specialist audit firm. This study uses data on auditor changes from Audit Analytics, financial data from North American Compustat, and hand-collected data including audit committee characteristics (such as audit committee chair tenure, the proportion of auditing experts on the audit committee, etc.), the number of audit committee meetings and stock ownership from proxy statements between 2005 and 2011. The results reveal that firms with audit committees that have a large proportion of auditing experts are more likely to choose an industry specialist auditor when the firm switches its auditor. Furthermore, the results also show that the longer the tenure of the audit committee chair is, the more likely that the firm switches from a non-specialist to a specialist auditor. This study adds to the literature by exploring the association between audit committee effectiveness characteristics and auditor switches involving industry specialists. The findings inform regulators regarding the impact that audit committee effectiveness characteristics have on auditor switches involving specialists

Highlights

Audit committees assume an important monitoring role in corporate governance protecting the interests of shareholders and mitigating agency conflicts (Jensen & Meckling, 1976; Abbott & Parker, 2000). Gorshunov, Armenakis, Harris, and Walker (2021) suggest that the presence of a qualified audit committee director reduces the likelihood of financial corruption by 72% and acts as an effective overseer over financial reporting
The aim of this study is to investigate the association between audit committee effectiveness characteristics and auditor switches to or from an industry specialist audit firm
After controlling for corporate governance and financial performance, we find that firms with audit committees that have a greater proportion of auditing experts are more likely to switch from non-specialist auditors to industry specialist auditors than switch to other non-specialists

Summary

Introduction

Audit committees assume an important monitoring role in corporate governance protecting the interests of shareholders and mitigating agency conflicts (Jensen & Meckling, 1976; Abbott & Parker, 2000). Gorshunov, Armenakis, Harris, and Walker (2021) suggest that the presence of a qualified audit committee director reduces the likelihood of financial corruption by 72% and acts as an effective overseer over financial reporting. They report that the proportion of non-executive directors in the audit committee significantly influences whether a firm chooses a specialist, while the proportion of financial experts in the audit committee and meeting frequency are insignificant in the decision of choosing a specialist They point out that “mixed results for the effectiveness of audit committees indicate that the audit committee [effectiveness] measures need to be applied with more precision” We intend to fill this literature gap by answering the following research question: RQ1: Is the likelihood that a firm switches to an industry specialist associated with a comprehensive set of audit committee effectiveness characteristics, such as the proportions of financial and auditing experts, directorships of committee members, tenure and expertise of the audit committee chair, meeting frequency, and audit committee size?

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