The Role of Audit Committees in Managing Relationships with External Auditors after SOX: Evidence from the US

Abstract

Recent US reforms aimed at strengthening audit committees and their structure assign independent audit committees the responsibility to appoint, dismiss, and compensate auditors. We examine the association between audit committee characteristics and auditors' compensation and dismissals following the enactment of SOX. We observe that stronger audit committees demand higher level of assurance and are less likely to dismiss their auditors. Further, we find increase in auditor independence as measured by reduced board involvement and less dismissals following unfavorable audit opinion. Our overall results suggest that increased audit committee roles and independence after SOX contribute to auditor independence and audit quality.