The Impact of Auditor Selection Regime and Audit Committee Autonomy on Investment Decisions

• In Event: Audit Quality 4

Abstract

ABSTRACT: After the recent financial crisis and corporate failures, regulatory bodies have proposed and, in some cases, enacted mandatory audit firm rotation or mandatory periodical tendering to enhance auditor independence and resulting audit quality. However, there is limited empirical evidence of the efficacy of such measures. Further, since the audit committee can have significant influence in the oversight of the audit process and financial reporting, the effectiveness of these measures likely depends on the strength of corporate governance within a company. In particular, the de facto autonomy of the audit committee from management in selecting and appointing the audit firm can potentially create a perceived auditor self-interest threat. This study focuses on auditor independence in appearance and examines the impact of auditor selection regime (rotation, tendering, and the current regime) and the autonomy of the audit committee (high, low) on investors’ investment decisions. The results from an experiment with 118 investment professionals suggest that given a high autonomy audit committee, rotation and tendering both lead to the highest investment level, as predicted. However, given low audit committee autonomy, all auditor selection regimes result in an equally low likelihood of investing. Further, we obtain a significant positive main effect of audit committee autonomy but find that this effect holds for rotation and tendering but not for the current regime. Collectively, the findings underscore that auditor selection regimes should not be viewed in isolation, but rather as part of the overall monitoring of financial reporting, which includes elements of corporate governance.

Authors

• Anna Gold, VU University Amsterdam

• Patrick Klynsmit, University of Amsterdam

• Philip H Wallage, University of Amsterdam

• Arnold Wright, Northeastern University