Audit committee effectiveness characteristics and auditor switches involving industry specialists

The aim of this study is to investigate the association between audit committee effectiveness characteristics and auditor switches to or from an industry specialist audit firm. This study uses data on auditor changes from Audit Analytics, financial data from North American Compustat, and hand-collected data including audit committee characteristics (such as audit committee chair tenure, the proportion of auditing experts on the audit committee, etc.), the number of audit committee meetings and stock ownership from proxy statements between 2005 and 2011. The results reveal that firms with audit committees that have a large proportion of auditing experts are more likely to choose an industry specialist auditor when the firm switches its auditor. Furthermore, the results also show that the longer the tenure of the audit committee chair is, the more likely that the firm switches from a non-specialist to a specialist auditor. This study adds to the literature by exploring the association between audit committee effectiveness characteristics and auditor switches involving industry specialists. The findings inform regulators regarding the impact that audit committee effectiveness characteristics have on auditor switches involving specialists

Timing of auditor terminations and client firm risk

Purpose The purpose of this study is to examine whether the timing of auditor terminations signals the riskiness of client firms. Design/methodology/approach This empirical study uses a sample of auditor switches during 2003-2014 to conduct univariate tests and multivariate regression analyses. Auditor switches occurring after the audit report date but before the shareholders’ meeting are classified as “planned” terminations and auditor switches that occur outside of this window are classified as “abrupt” terminations. Findings First, abrupt terminations are more strongly related to client risk factors than planned terminations. Second, relative to planned terminations, abrupt terminations are more likely to result from an auditor resignation rather than a client dismissal. Third, abrupt termination firms are more likely to have internal control weaknesses and experience delistings in the following year. Future operating performance is also worse after an abrupt termination. Finally, auditors and investors view abrupt terminations as riskier than planned terminations. Practical implications As the timing of the auditor termination is publicly available information, it can provide an important signal of deteriorating financial performance to shareholders and potential investors. Abrupt terminations could be costly to shareholders because those firms likely have lower quality financial reporting (due to internal control weakness) and deterioration of future operating performance. Originality/value While concurrent studies investigate the relation between the timing of new auditor appointment and audit quality, this is the first study to document the relation between the timing of auditor termination and the riskiness of client firms.

The consequences of audit committee quality

Purpose This study aims to examine the consequences when audit committees have different economic incentives (i.e. incentive-based compensation) to switch auditors. Design/methodology/approach The author focuses on companies experiencing an auditor switching event (client-initiated dismissals) and uses Heckman’s (1997) two-stage estimation procedure to control endogenous bias. Audit committee quality is measured by the level of incentive-based compensation. Accrual quality and abnormal audit fees are examined over the periods of auditor switches. Findings Using 1,087 US companies between 2006 and 2014, the author found that audit committees’ incentive-based compensation is negatively (positively) associated with accruals quality (abnormal audit fees) only when companies switch from Big 4 to non-Big 4 auditors or switch within non-Big 4 auditors. For companies that switch from non-Big 4 to Big 4 auditors, she found no evidence. Research limitations/implications This study provides a detailed discussion of the consequences of audit committee quality. The findings also contribute to the literature by concluding that economic incentives are associated with ineffective oversight, particularly after auditor switches. Practical implications Sarbanes–Oxley Act and its associated regulations significantly expanded the oversight role of audit committees. However, regulators bypassed restrictions on audit committee compensation. Accordingly, the author suggests that regulators focus on the issue of economic incentives to improve audit committee quality. Originality/value Minimal research has been conducted on the role of audit committees when companies switch to a new external auditor. The author shows that when companies switch auditors, incentive-based compensation significantly affects the monitoring quality of audit committees.

Introductory Audit Homework Handouts: A Bridge from Class to Auditors' Professional Responsibilities

SUMMARY Three Homework Handouts are presented for use by instructors in undergraduate or graduate introductory audit courses. The Homework Handouts give students an opportunity to bridge the material they are learning in class to real-world situations they may be facing in the auditing profession. The Homework Handouts focus on auditor switches, independence, ethical dilemmas, and PCAOB inspection reports. Students complete the Homework Handouts throughout a semester of introductory audit. After completing each assignment, students should be ready for class discussion.