Alternative Title

The impact of CEO/CFO outside directorships on auditor selection and audit quality

Publication Type

Conference Paper

Publication Date

5-2016

Abstract

This study examines whether the professional ties of Chief Executive Officers/Chief Financial Officers (CEO/CFOs) to auditors through external directorships affect auditor selection and subsequent audit quality. Professional ties to auditors arise when the CEO/CFO of a firm (referred to as the home firm) serves as an outside director of another firm that hires an auditor (a connected auditor). Using a sample of firms with auditor switches over the period 2003-2012, we find that home firms are more likely to appoint connected auditors. Furthermore, utilizing a difference-in-differences approach, we find that home firms appointing connected auditors experience a significant decline in subsequent audit quality, compared with firms that appoint nonconnected auditors. Specifically, our results show that the likelihood of misstatements, the propensity to meet or just beat earnings benchmarks, and the magnitude of discretionary accruals increase after the home firms appoint connected auditors. We further provide some evidence that the negative effect on subsequent audit quality is more pronounced when the connection is via the same auditor office or audit committee membership. Collectively, our findings suggest that the network ties between the CEO/CFO and auditors through external directorship significantly influence the home firm’s auditor selection decisions and that the appointment of a connected auditor results in a downside of connections in terms of audit quality.

Keywords

CEO/CFO outside directorship, auditor selection, audit quality, auditor independence

Discipline

Accounting | Business Law, Public Responsibility, and Ethics | Corporate Finance

Research Areas

Corporate Governance, Auditing and Risk Management

Publication

European Accounting Association 39th Annual Congress 2016, May 11-13

City or Country

Maastricht

Embargo Period

3-22-2018

Copyright Owner and License

Authors

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Comments

Paper was updated on November 2017

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