Ownership Structure and Auditor Selection

Managerial Auditing Journal, forthcoming.

27 Pages Posted: 21 Nov 2017 Last revised: 5 Oct 2020

See all articles by Curtis M. Hall

Curtis M. Hall

Drexel University - Bennett S. LeBow College of Business

Benjamin W. Hoffman

Cleveland State University

Zenghui Liu

Western Washington University - Accounting

Date Written: July 13, 2020


Purpose: This paper investigates the effect that ownership structure (public vs. private) has on the demand for high-quality auditors, specifically in the U.S. banking industry.

Design/Methodology/Approach: We predict that public banks are more likely to hire a high-quality auditor than private banks and pay a higher audit fee premium for that high-quality auditor (due to higher agency costs, more demand for financial information and higher litigation risk). We analyze 2008-2014 banking data from the Federal Reserve using probit and OLS regression analysis to examine if there is a higher probability that public banks choose higher quality auditors and pay higher audit fees when they do so.

Findings: Our results show that private banks are less likely to hire Big 4 auditors and industry-expert auditors than public banks. We also find that both private and public banks pay higher audit fees for Big 4 and industry-expert auditors, and that public banks pay a higher premium for Big 4 auditors and industry experts than private banks.

Research Limitations/Implications: Our findings may not be full generalizable to other types of firms, as banking is a heavily regulated and complex industry. However, inferences from our study may be generalizable to other similar industries such as insurance or healthcare.

Practical Implications: The results of this paper imply that public and private banks have differing priorities when hiring their financial statement auditor. This may be of interest to investors and auditing regulators.

Social Implications: The findings of this paper underscore the value of hiring an industry-expert auditor in an industry that is highly complex and regulated. This may be of interest to managers and policymakers.

Originality/Value: Due to data restrictions, the emphasis of prior literature on the banking industry has been on public banks. Our study is the first to analyze the differences between public and private banks’ demand for audit services.

Keywords: ownership structure, auditor selection, auditor choice, audit fees, banking

Suggested Citation

Hall, Curtis M. and Hoffman, Benjamin W. and Liu, Zenghui, Ownership Structure and Auditor Selection (July 13, 2020). Managerial Auditing Journal, forthcoming., Available at SSRN: https://ssrn.com/abstract=3072734 or http://dx.doi.org/10.2139/ssrn.3072734

Curtis M. Hall

Drexel University - Bennett S. LeBow College of Business ( email )

Philadelphia, PA 19104
United States

Benjamin W. Hoffman (Contact Author)

Cleveland State University ( email )

2121 Euclid Ave
Cleveland, OH 44115
United States
2166874723 (Phone)

Zenghui Liu

Western Washington University - Accounting ( email )

United States

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