||Academic Directors on Audit Committees and Auditor Selection
||Department of Accountancy
A series of accounting frauds induced by the improper auditors enforce the SEC to mandate effective audit committees in publicly listed firms pay more effort to hire the higher quality of auditors to ensure the financial reporting quality. Many previous studies
have documented that the composition of audit committees may impact their effectiveness on auditor selections. College professors with integrity and education levels are expected to be capable of serving as audit committee members. In this research, we examine whether academic directors on audit committees are more likely to hire the Big 4 audit firms in order to enhance the financial reporting quality. Moreover, whether academic
directors with accounting and finance education specializations may affect the selection of auditors is my another research purpose. Then, we also explore whether academic directors with executive position in audit committees tend to select the Big 4 auditors. The empirical results show that due to knowing the importance of financial reporting quality, accounting and finance professors on audit committee tend to choose Big 4 audit firms since their professional knowledge brings extra concern on financial reporting quality. In addition,
professors with executive positions are positively related to the selection of Big 4 audit firms.
1. INTRODUCTION ..................................... 1
2. LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT ..... 5
3. SAMPLE SELECTION AND RESEARCH DESIGN ............ 11
3.1 Data and Sample Selection .....................11
3.2 Empirical Models ............................. 12
4. EMPIRICAL RESULTS ............................... 16
4.1 Descriptive Statistics ....................... 16
4.2 Correlations ................................. 17
4.3 Multivariate Results ......................... 17
5. CONCLUSION ...................................... 22
6. Reference ....................................... 22
Alastair Lawrence, Miguel Minutti-Meza, and Ping Zhang. Can Big 4 versus Non-Big 4 Differences in
Audit-Quality Proxies Be Attributed to Client Characteristics? The Accounting Review 86 (1): 259-286.
American Bar Association. Corporate Director’s Guidebook, Chicago, IL: American press International.1978.
Anderson, R. C., Reeb, D. M., Upadhyay, A. and Zhao, W. The Economics of Director Heterogeneity.
Financial Management 40 (1): 5–38. (2011)
April Klein. Audit committee, board of director characteristics, and earnings management, Journal of
Accounting and Economics 33 (3): 375–400. (2002)
Aron A. Gottesman, Matthew R. Morey. Manager education and mutual fund performance. Journal of
Empirical Finance 13 (2): 145-182. (2006)
Aronson, E. Integrating leadership styles and ethical perspectives. Canadian Journal of Administrative
Sciences 18 (4): 244–256. (2001)
Balvers, R., B. McDonald, and R. Miller. Underpricing of new issues and the choice of auditors as a signal of
investment banker reputation. The Accounting Review 63 (4):605–22. (1988)
Bhagat, S., B. Bolton, and A. Subramanian. CEO education, CEO turnover, and firm performance. Working
paper. University of Colorado at Boulder 3 (August). (2010)
Biao Xie, WN Davidson III, PJ DaDalt. Earnings management and corporate governance: the role of the
board and the audit committee Journal of corporate finance 9 (3): 295–316. (2003)
Boone, J. P., I. Khurana, and K. K. Raman. Do the Big 4 and second-tier firms provide audits of similar
quality? Journal of Accounting and Public Policy 29 (4): 330–352. (2010)
Braiotta, L. The audit Committee Handbook. New York, NY: John Wiley & Sons. (1994)
Carcello, Joseph V. and Hollingsworth, Carl W. and Klein, April, Audit Committee Financial Expertise,
Competing Corporate Governance Mechanisms, and Earnings Management (February). NYU Working
Conference Board. The Audit Committee: A Boarder Mandate. New York, NY: American Society of
Corporate Secretaries, Inc. (1988).
Darmadi, S. Board Members’ Education and Firm Performance: Evidence from a Developing Economy.
Working paper. (2011)
Dechow, P. M, R. G. Sloan, and A. P. Sweeney. Causes and consequences of earning manipulation: An
analysis of firms subject to enforcement actions by the SEC. Contemporary Accounting Research 13:
DeZoort and Salterio, F. DeZoort, S. Salterio. The effects of corporate governance experience and financial
reporting and audit knowledge on audit committee members’ judgment Auditing: A Journal of Practice
and Theory, 20 (2):31–47. (2001)
Doyle, J., Ge, W., McVay, S., forthcoming. Determinants of weaknesses in internal control over financial
reporting Journal of Accounting and Economics.
Evidence from US-Traded Foreign Firms. International. Journal of Banking and Finance 8 (1): 59-75.
Fama, E, and M. Jensen. Agency problems and residual claims. Journal of Law and Economics 26 (2):
Firth, M., and A. Smith. Selecion of auditor firms by companies in the new issue market. Applied Economics
24: 247-255. (1992)
Francis, J. R., and E.R. Wilson. Auditor changes: A joint test of theories relating to agency costs and auditor
differentiation. The Accounting Review 63 (4): 663-683. (1988)
, and J. Krishnan. Accounting accruals and auditor reporting conservatism. Contemporary Accounting
Research 16 (1): 135–165. (1999)
F.Todd DeZoort. An analysis of experience effects on audit committee members’ oversight judgments
Accounting, Organizations and Society, 23 (1): 1–22. (1998)
---, and Steven E. Salterio. The Effects of Corporate Governance Experience and Financial‐Reporting and
Audit Knowledge on Audit Committee Members' Judgments. AUDITING: A Journal of Practice &
Theory 20 (2): 31-47. (2001)
Gopal. V. Krishnan and Gnanakumar Visvanathan. Does the SOX Definition of an Accounting Expert
Matter? The Association between Audit Committee Directors' Accounting Expertise and Accounting
Conservatism Contemporary Accounting Research 25 (3): 827–858. (2008)
Hambrick, D. C., & Mason, P. Upper echelons: The organization as a reflection of its top managers.
Academy of Management Review 9 (2): 193–206. (1984)
Henderson, J. G., & Nutt, P. G. The influence of decision style on decision making behavior.
Management Science 26 (4): 371-386. (1980)
Huang, H., Y. Yan, J.M. Fornaro, and A. Elshhat. Market reactions to audit committee director’s gender.
International Journal of Banking and Finance 8 (1): 59-74. (2011)
Inder K. Khurana and K. K. Raman. Litigation Risk and the Financial Reporting Credibility of Big 4 versus
Non‐Big 4 Audits: Evidence from Anglo‐American Countries. The Accounting Review 79(2): 473-495.
Jayanthi Krishnan. Audit Committee Quality and Internal Control: An Empirical Analysis. The Accounting
Review 80 (2): 649-675. (2005)
Jayanthi Krishnan, Yuan Wen, and Wanli Zhao. Legal Expertise on Corporate Audit Committees and
Financial Reporting Quality. The Accounting Review 86 (6): 2099-2130. (2011)
Jensen, M., and W. Meckling. Theory of the firm: Managerial behavior, agency costs and ownership structure.
Journal of Financial Economics 3: 305-360. (1976)
Jere R. Francis and Michael D. Yu. Big 4 Office Size and Audit Quality. The Accounting Review 84 (5):
John Daniel Eshleman and Peng Guo. Do Big 4 Auditors Provide Higher Audit Quality after Controlling for
the Endogenous Choice of Auditor? AUDITING: A Journal of Practice & Theory 33 (4): 197-219.
Johnson, W. B., and T. Lys. The market for audit services: Evidence from voluntary auditor changes, Journal
of Accounting and Economics 12 (January): 281-308. (1990)
Joseph V. Carcello and Terry L. Neal. Audit Committee Composition and Auditor Reporting. The Accounting
Review 7 (4): 453-467. (2000)
, and C.W Hollingsworth. Audit committee financial expertise, competing corporate governance
mechanisms, and earnings management A Klein - 2006 - papers.ssrn.com (2006)
Kalbers, L. P., and T. J. Fogarty. Audit committee effectiveness: An empirical investigation of the
contribution of power. AUDITING: A Journal of Practice & Theory (Spring): 24–49. (1993)
Kandel, E. and E.P. Lazear. Peer Pressures and Partnerships, Journal of Law and Economics 41, 275-303.
Keeney, R. L. Value-focused thinking: A path to creative decision-making. Gambridge, MA: Harvard
University Press. (1992)
Kirk Panel. Strengthening the Professionalism of the Independent Auditor. Stanford, CT: Public Oversight
Krishnan, J. Krishnan. Audit committee financial expertise and internal control: an empirical analysis The
Accounting Review, 80 (2): 649–675. (2005)
Lawrence J. Abbott, Susan Parker, and Gary F. Peters. Audit Committee Characteristics and Restatements.
AUDITING: A Journal of Practice & Theory 23 (1): 69-87. (2004)
, and Susan Parker. Auditor selection and Audit Committee Characteristics. AUDITING: A Journal of
Practice & Theory 19 (2): 47-66. (2000)
Linda McDaniel, Roger D. Martin, and Laureen A. Maines. Evaluating Financial Reporting Quality: The
Effects of Financial Expertise vs. Financial Literacy. The Accounting Review77 (1): 139-167. (2002)
Mark S. Beasley. An empirical analysis of the relation between the board of director composition and
financial statement fraud, The Accounting Review 71(4): 443-465. (1996)
Mendonca, M. Preparing for ethical leadership in organizations. Canadian Journal of Administrative
Sciences18 (4): 266–276. (2001)
Menon, K, and J. D. Williams. The use of audit committees for monitoring. Journal of Accounting and public
policy 13 (spring): 121-139. (1994)
Mautz, R. K., and F. L. Newmann. Corporate Audit Committees: Policies and Practices. Cleveland, OH:
Ernst and Ernst. (1970)
National Commission on Fraudulent Financial Reporting (the Treadway Commission). (1987)
Norburn. D. The chief executive: A breed apart. Strategic Management Journal 10 (1): 1 -55. (1988)
Oliver E. Williamson. Corporate Finance and Corporate Governance. The Journal of Finance 43 (3): 567-591.
Parker, S. The association between audit committee characteristics and the conservatism of
financial reporting. Working paper, Santa Clara University. (2000)
Price Waterhouse. Improving Audit Committee Performance: What Works Best. Altamonte Springs, FLInstit
ute of Internal Auditors Research Foundation. (1993)
Public Oversight Board (POB) of the SEC Practice Section. Special Report: Issues Confronting the
Accounting Profession. Stamford, CT: Public OversightBoard. (1993)
Raghunandan et al, K. Raghunandan, W. Read, D. Rama. Audit committee composition, “grey directors,” and
interaction with internal auditing. Accounting Horizons 15 (2): 105–118. (2001)
Reinstein, A., J. Callaghan, and L. Braiotta, Jr. Voluntary formation of corporate audit committees: Reducing
directors’ legal liabilities. Journal of Urban Law 61: 375-389. (1984)
Renée B. Adams, Daniel Ferreira. Women in the boardroom and their impact on governance and performance.
Journal of Financial Economics Volume 94, Issue 2, November 2009, Pages 291–309. (2009)
Scarbrough et al., D. Scarbrough, D. Rama, K. Raghunandan. Audit committee composition and interaction
with internal auditing: Canadian evidence Accounting Horizons12 (1): 51–62. (1998)
Schwenk, C. R. The essence of strategic decision making. Lexington, MA: Lexington Books. (1988)
Scott N. Bronson, Joseph V. Carcello, Carl W. Hollingsworth, Terry L. Neal. Are fully independent audit
committees really necessary? Journal of Accounting and Public Policy 28 (4): 265–280. (2009)
Simon, D. Additional evidence on the large audit-firm fee premium as an indicator of auditor quality. Journal
of Applied Business Research 21: 21-33. (1997)
Srinidhi, B., F.A. Gul, and J. Tsui. Female Directors and Earnings Quality. Contemporary Accounting
Research 28 (5): 1610-1644. (2011)
Steven T. Petra, Do outside independent directors strengthen corporate boards? Corporate Governance: The
international journal of business in society 5 (1): 55 – 64. (2005)
Wally, S., Baum, J. Personal and Structural Determinants of the Pace of Strategic Decision Making. Academy
of Management Journal 37: 932-956. (1994)
Wier, Benson and Stone, Dan N. and Hunton, James E., Does Graduate Education Contribute to Professional
Accounting Success?. Accounting Horizons19 (2): 99-114. (2005)
Weili Ge and Sarah McVay. The Disclosure of Material Weaknesses in Internal Control after the Sarbanes‐
Oxley Act. Accounting Horizons19 (3): 137-158. (2005)
William L. Gardner , Bruce J. Avolio, Fred Luthans, Douglas R. May, Fred Walumbwa. “Can you see the real
me?” A self-based model of authentic leader and follower development, The Leadership Quarterly 16
(3): 343–372. (2005)
Wolnizer, P. W. Are audit committees red herrings? Abacus 31: 45–66. (1995)
Yan Zhanga, Jian Zhou, Nan Zhou. Audit committee quality, auditor independence, and internal control
weaknesses. Journal of Accounting and Public Policy 26 (3): 300–327. (2007)