Affiliation of former auditors on bank audit committees and nonaudit fees

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 7: Audit Committees

Abstract

This paper examines whether the affiliation of former auditors on large banks’ audit commit-tees is associated with the acquisition of nonaudit services. Using a sample of large banks in-cluded in the S&P Composite 1500, we find that audit committees with an affiliated former auditor as chair approve a larger proportion of nonaudit fees. A closer examination reveals that the association mostly stem from lower audit fees, which might reflect their negotiation power over their previous employer, but also, or alternatively, a lower demand for audit effort. Addi-tional analyses reveal that our findings are more prominent in the context of greater earnings management and during the global financial crisis. Overall, this study suggests that bank audit committee members’ prior affiliation with the incumbent audit firm is related to higher propor-tion of nonaudit services procured from the audit firm, therefore, potentially increasing audi-tors’ fee dependence.

Authors

• Kim Ittonen, Hanken School of Economics

• Emma-Riikka Myllymäki, Aalto School of Economics

• Per Christen Tronnes, University of New South Wales