The Impact of the Auditor Selection Process and Audit Committee Appointment Power on Investment Recommendations

Posted: 22 Aug 2014 Last revised: 2 Nov 2017

See all articles by Anna Gold

Anna Gold

Vrije Universiteit Amsterdam; Norwegian School of Economics (NHH)

Patrick Klynsmit

University of Amsterdam Business School

Philip Wallage

VU University Amsterdam; University of Amsterdam - Business School

Arnold Wright

Northeastern University - Accounting Group

Date Written: January 4, 2017

Abstract

After the global 2018 financial crisis, regulatory bodies proposed alternative auditor selection processes to enhance auditor independence such as mandatory audit firm rotation or mandatory tendering (i.e., rotation which allows for the current auditor to be reappointed). However, these alternative selection processes may not be effective if management has substantial influence over auditor appointment decisions. We posit that disclosures of high appointment power of the audit committee will enhance the perceived effectiveness of rotation and tendering, thus, increasing investment recommendations. In an experimental study involving 118 experienced investment professionals, we examine the impact of the auditor selection process (mandatory rotation, mandatory tendering, and voluntary selection) and the appointment power of the audit committee (high, low) on investment recommendations. We find that audit committee appointment power affects investment recommendations only when a possible auditor change is anticipated (i.e., in the case of rotation and tendering), but not when the auditor selection is voluntary. Further, rotation and tendering lead to a higher recommended investment likelihood than voluntary selection, but only when an audit committee has high appointment power. In all, the findings underscore that investors do not view auditor selection processes in isolation of a company’s internal corporate governance mechanisms.

Keywords: audit firm rotation; audit firm tendering; audit firm voluntary selection; audit committee appointment power; investment recommendations, corporate governance

JEL Classification: M42, M48, G11

Suggested Citation

Gold, Anna and Klynsmit, Patrick and Wallage, Philip and Wright, Arnold, The Impact of the Auditor Selection Process and Audit Committee Appointment Power on Investment Recommendations (January 4, 2017). Auditing: A Journal of Practice & Theory, 2018, Available at SSRN: https://ssrn.com/abstract=2484415 or http://dx.doi.org/10.2139/ssrn.2484415

Anna Gold (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 598 25 92 (Phone)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

Patrick Klynsmit

University of Amsterdam Business School ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

Philip Wallage

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
31 6 5120 6178 (Phone)

University of Amsterdam - Business School ( email )

Faculty of Economics and Econometrics
Roetersstraat 11
1018 WB Amsterdam
Netherlands
31 6 5120 6178 (Phone)

Arnold Wright

Northeastern University - Accounting Group ( email )

406 Hayden Hall
United States

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