Audit Committee Characteristics and the Safeguarding of Auditor Independence

Abstract:     
In this paper, we examine the relation between audit committee characteristics and the safeguarding of auditor independence, as proxied for by whether auditors are dismissed following the issuance of internal control material weakness reports. We use the proportion of current audit committee members that joined the board prior to the Chief Executive Offer taking office to measure audit committee independence in fact. Thus, we distinguish between independence in fact and independence in appearance, where the latter refers to audit committees comprised exclusively of outside board members. We find that although auditors are more likely to be dismissed after the issuance of internal control material weakness reports, this likelihood is lower when audit committees are more independent in fact, when they have more financial expertise, and when they have more governance expertise (measured by the average number of other boards on which audit committee members sit). Our results suggest that audit committee independence in fact matters even when audit committees are required to be fully independent in appearance. Overall, our results demonstrate the importance of audit committees in safeguarding auditor independence in the post-Sarbanes-Oxley period.

Number of Pages in PDF File: 39

Keywords: audit committee independence, financial expertise, internal control, auditor dismissal, auditor independence

JEL Classification: M41, M42

working papers series