Do Alma Mater Ties between the Auditor and Audit Committee Affect Audit Quality?

Posted: 2 Sep 2021

See all articles by Divesh Sharma

Divesh Sharma

Kennesaw State University, School of Accountancy

Madhukar Singh

Australian National University

Arvind Patel

Independent

Date Written: August 23, 2021

Abstract

We examine whether audit firm alma mater ties between the auditor and the audit committee (AC) are associated with significantly greater nonaudit services (NAS) provided by the auditor. We further examine whether greater NAS in the presence of such alma mater ties are associated with audit quality. Since the AC is responsible for approving and monitoring the services provided by the auditor, the presence of AC and auditor alma mater ties underscores the controversies surrounding such ties’ undermining audit quality. Predicating our hypotheses on social ties theory, we find a positive association between the presence of an audit firm alumnus on the AC and NAS acquired from the alma mater auditor. We further find that this association becomes stronger as the tenure of the alumnus increases. Next, using multiple measures of audit quality, we find that, when the alumnus on the AC is associated with significantly more NAS provided by the alma mater audit firm, the quality of the audit suffers. Collectively, our results suggest that audit firm alma mater ties between the AC and auditor engender economic ties that adversely affect audit quality. Our study provides new evidence on the channels through which the quality of the audit is affected and raises important implications for the composition of the AC, auditor-provided NAS, and client assignment to engagement partners.

Keywords: alumnus, audit committees, audit quality, nonaudit services, partners, social ties

Suggested Citation

Sharma, Divesh Shankar and Singh, Madhukar and Patel, Arvind, Do Alma Mater Ties between the Auditor and Audit Committee Affect Audit Quality? (August 23, 2021). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3912514

Divesh Shankar Sharma (Contact Author)

Kennesaw State University, School of Accountancy ( email )

Kennesaw, GA 30144
United States

Madhukar Singh

Australian National University ( email )

Canberra
Australia

Arvind Patel

Independent ( email )

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