Audit Firm Appointments, Audit Firm Alumni, and Audit Committee Independence

Posted: 27 Aug 2011

See all articles by Clive S. Lennox

Clive S. Lennox

University of Southern California

Chul W. Park

The University of Hong Kong - School of Business

Date Written: 2007

Abstract

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

Lennox, Clive and Park, Chul Won, Audit Firm Appointments, Audit Firm Alumni, and Audit Committee Independence (2007). Contemporary Accounting Research, Vol. 24, No. 1, p. 235, Spring 2007, Available at SSRN: https://ssrn.com/abstract=942178

Clive Lennox (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Chul Won Park

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China
+852-2859-1081 (Phone)

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