Publication Type

Journal Article

Version

submittedVersion

Publication Date

8-2021

Abstract

We examine whether outside directorships of chief executive officer/chief financial officer (CEO/CFO) and resulting network ties to auditors affect auditor selection decisions and subsequent audit quality. The network ties arise when the CEO/CFO of a firm (home firm) serves as an outside director of another firm that hires an auditor (connected auditor). Using a sample of firms that switch auditors in the post-Sarbanes-Oxley Act period, we find that home firms are more likely to appoint connected auditors. We also find that home firms hiring connected auditors experience a significant decline in subsequent audit quality, compared to those hiring non-connected auditors. Specifically, the increases in the likelihood of misstatements, the magnitude of absolute discretionary accruals, and the propensity to meet or beat earnings benchmarks after home firms appoint connected auditors are significantly greater, compared to those for other firms switching to non-connected auditors. We further find that the decline in audit quality is more pronounced when the network is established at the local office level.

Keywords

CEO/CFO outside directorship, Auditor selection, Audit quality, Auditor independence

Discipline

Accounting | Corporate Finance

Research Areas

Corporate Governance, Auditing and Risk Management

Publication

European Accounting Review

Volume

30

Issue

4

First Page

611

Last Page

643

ISSN

0963-8180

Identifier

10.1080/09638180.2020.1807381

Publisher

Taylor & Francis

Embargo Period

3-28-2021

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1080/09638180.2020.1807381

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