Abstract
Reliable financial reporting is highly important when aiming for sustainable development and the long-term financial stability of the entire economy. An external audit is one of the main monitoring mechanisms to warrant this reliability. While auditing serves as an independent monitoring mechanism towards management, studies indicate that management is often the driving force behind auditor appointments and terminations, especially if it is willing to drive auditor choice. While this raises questions about an auditor’s independence and resulting audit quality, willingness will only have an impact when management is also able to exert its will. This study, therefore, examines to what extent ability strengthens the CEO’s willingness to appoint a non-Big Four auditor. Using a dataset of 316 private firms, regression results show that when the CEO is willing to appoint a non-Big Four auditor and also has sufficient power, it is less likely that a Big Four auditor is actually appointed, at least when the control effectiveness of the board is weak such that the CEO can exert his/her power. This emphasizes the need for both shareholders and legislators to ensure that the independence of the auditor is guaranteed and to implement complementary monitoring mechanisms like a strong board.
Highlights
IntroductionGiven that private firms are considered to be one of the main growth engines of an economy [1], it is of utmost importance that people and institutions keep investing in private firms
Decent work and economic growth is one of the 17 Sustainable Development Goals
We studied the influence of the CEO on auditor choice in the Belgian private firm context
Summary
Given that private firms are considered to be one of the main growth engines of an economy [1], it is of utmost importance that people and institutions keep investing in private firms In this regard, the reliability of accounting information or financial statements of these firms is highly relevant. Auditor choice is an intensively investigated topic, which generally examines the drivers for appointing a Big Four auditor over a non-Big Four auditor (e.g., [2,3,4]) These drivers are mainly related to agency conflicts as auditing exists to assist a firm’s shareholders in monitoring and contracting with management, in this way reducing agency problems [5]. Firms with severe agency conflicts are generally expected to appoint a Big Four auditor
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