The Impact of CEO/CFO Outside Directorships on Auditor Selection and Audit Quality

52 Pages Posted: 29 Sep 2020

See all articles by Jaeyoon Yu

Jaeyoon Yu

Erasmus University

Byungjin Kwak

affiliation not provided to SSRN

Myung Seok Park

Virginia Commonwealth University (VCU) - School of Business

Yoonseok Zang

Singapore Management University - School of Accountancy

Date Written: August 3, 2020

Abstract

We examine whether outside directorships of chief executive officer/chief financial officer (CEO/CFO) and resulting network ties to auditors affect auditor selection decisions and subsequent audit quality. The network ties arise when the CEO/CFO of a firm (home firm) serves as an outside director of another firm that hires an auditor (connected auditor). Using a sample of firms that switch auditors in the post-Sarbanes-Oxley Act period, we find that home firms are more likely to appoint connected auditors. We also find that home firms hiring connected auditors experience a significant decline in subsequent audit quality, compared to those hiring non-connected auditors. Specifically, the increases in the likelihood of misstatements, the magnitude of absolute discretionary accruals, and the propensity to meet or beat earnings benchmarks after home firms appoint connected auditors are significantly greater, compared to those for other firms switching to non-connected auditors. We further find that the decline in audit quality is more pronounced when the network is established at the local office level.

Keywords: CEO/CFO outside directorship, auditor selection, audit quality, auditor independence

JEL Classification: G34, M40, M42

Suggested Citation

Yu, Jaeyoon and Kwak, Byungjin and Park, Myung Seok and Zang, Yoonseok, The Impact of CEO/CFO Outside Directorships on Auditor Selection and Audit Quality (August 3, 2020). Forthcoming, European Accounting Review, Singapore Management University School of Accountancy Research Paper No. 2021-123, Available at SSRN: https://ssrn.com/abstract=3673066

Jaeyoon Yu (Contact Author)

Erasmus University ( email )

Netherlands

Byungjin Kwak

affiliation not provided to SSRN

Myung Seok Park

Virginia Commonwealth University (VCU) - School of Business ( email )

301 W. Main St.
School of Business
Richmond, VA 23284-4000
United States
(804)828-3161 (Phone)

Yoonseok Zang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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