Audit Firm Appointments, Audit Firm Alumni, and Audit Committee Independence
Posted: 27 Aug 2011
Date Written: 2007
A company officer is an "alumnus" if he previously worked for an audit firm. Iyer et al. (1997) find alumni have ties with their former audit firms and alumni are more inclined to provide economic benefits to former firms if they have stronger ties. If the alumnus is a senior corporate officer, the alumnus may benefit her former firm by recommending that the company appoints the firm as its auditor. However, the company's audit committee may be concerned that officer-auditor ties threaten audit quality. Therefore, an independent audit committee may not sanction the appointment of the officer's former firm. This study investigates whether: (1) companies tend to appoint officers' former audit firms, and (2) independent audit committees mitigate this tendency. We document that companies appoint officers' former firms more often than they appoint alternative audit firms. However, companies are less likely to appoint officers' former firms if audit committees are more independent. This suggests that independent audit committees strengthen audit quality by deterring affiliations between audit firms and officers.
Keywords: affiliations, audit quality, audit committees
JEL Classification: M420, M500
Suggested Citation: Suggested Citation