Board Interlocks and Auditor Choice: Firm and Partner Level

Abstract

This study investigates how board networks affect the directors’ decision to retain auditors who are industry experts. Based on the unique data in Taiwan, where the audit report is issued in the name of two signing auditors as well as the audit firm, we find that a firm is more likely to retain an audit firm (or partner) that is an industry expert if it shares a director with another firm that retains firm-level (or partner-level) specialists. In addition, we find that firms are more likely to retain both auditing firms and partners that are industry specialists if one or more of its directors serve on the boards of other firms that retain specialists at both levels. In parallel, we find that audit quality is associated with interlocked boards. Specifically, a firm is likely to have higher audit quality if it shares common directors with another firm that uses both a firm and a lead partner with industry expertise. Together, these findings substantiate the spillover effect of interlocked boards on corporate decisions to appoint auditors who are industry specialists, which in turn determines audit quality.

Keywords: board interlock, auditor choice, industry-experienced auditors, audit quality

JEL Classification: M41, M42, G30