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The Audit Committee Oversight Process of the External Audit: Auditor Selection and Monitoring

Sat, January 18, 7:30 to 8:30am, TBA

Abstract

This paper investigates the audit committee’s oversight process of the external auditor. We specifically focus on the interplay between the tasks of the audit committee in auditor selection and monitoring, on the one hand, and the regulatory concerns on audit fee pressure and availability of auditor information on the other hand. Based on survey results from 149 audit committee members in different countries, we find that respondents generally do not identify audit fee as a main selection criterion, but that skills, experience and expertise of the auditor are key for selection of the external auditor. However, more management relative to audit committee involvement in the auditor selection process increases the likelihood that audit fees become a main auditor selection criterion. Furthermore, we find that pricing becomes less relevant when sufficient information is available to make an informed auditor selection. With regard to monitoring, we find that sufficient information and appropriate auditor communication is considered to be highly important for effective monitoring of the external auditor. Interestingly, our main results appear to be cross-sectionally robust, and the audit committee members responding to our survey mainly make use of private information sources and appear to have sufficient information at their disposal to fulfill their oversight role of selecting and monitoring the external auditor. This would alleviate regulators’ concerns that audit committees may not be able to make informed decisions because of insufficient transparency on audit firms’ governance practices and audit quality.

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