Auditor Concentration and the Impact of Interlocking Directorates

Abstract

The structure of the auditing profession and the profile of auditors' clients have been the subject of a number of studies. These studies range in nature from those which have principally sought to map the overall profiles (Gilling and Stanton [1978] and Zeff and Fossum [1967]) to those which have endeavored to provide explanatory models for auditor concentration (Eichenseher and Danos [1981]). To date, however, no study has systematically examined the impact that interlocking directorates, themselves the subject of a large amount of research,1 might have on the choice of a company's auditor. The objective of this paper is to present and test a model in which the choice of auditors by clients (and, thus, the development of an audit firm's client profile) can be partially explained by the ties between those client companies created by interlocking directorates. It will be shown that there is a significant relationship between the number of director interlocks of a company and the probability that these interlocked companies are audited by the same public accounting firm as the focal company. In the three sections of the paper that follow the methodology of the study is outlined, the results presented, and conclusions drawn.