Audit Quality: The Role of Board Structure in Family Firms

Abstract

This study investigates the role that board structure has on the demand for audit quality in connection with family ownership in a sample of private firms. In addition to this, we also shed light on whether ownership structure and board structure are substitute mechanisms in resolving agency costs in private family firms. Our main results show that the presence of outsiders on the board increases the demand for audit quality in the overall sample as well as in the presence of family ownership. Our results also confirm previous results and indicate that family firms are less likely to engage a Big 4 auditor even when we control for board structure. Additionally, we find that in a subsample of family firms the probability of choosing a Big 4 auditor decreases with an increase in CEO ownership and is higher in firms with outside boards. When we investigate the interaction between CEO ownership and outside boards, we find that role of outside boards is weaker when CEO ownership increases.

Keywords: Board Structure, Audit Quality, Private firms

JEL Classification: G30