AUDIT COMMITTEE CHAIR CHARACTERISTICS, AND AUDITOR DISMISSAL IN A GOING CONCERN CONTEXT
Keywords:
Audit Committee Chair, Going Concern, Auditor Dismissal, Expertise.
Abstract
This study examines the role audit committee chair expertise may play in fostering audit quality. The 2002 Sarbanes–Oxley Act (SOX) was enacted to strengthen corporate governance practices in the United States; a fundamental part of this act addressed the audit committee structure and composition. Existing literature suggests that audit committee expertise may improve audit quality. In this study I use a logistic model to compare audit committee chair expertise characteristics for first-time going concern opinion firms that dismissed and did not dismiss the auditor after receiving the going concern opinion for the years 2008-2016 with that of firms that received clean opinions and dismissed or did not dismiss the auditor. I find that audit committee chairs with financial expertise, audit expertise, governance expertise and industry expertise are negatively associated with auditor dismissal. This suggests that firms with these audit committee chair expertise profiles may facilitate better audit quality. Moreover, the chair’s audit expertise, industry expertise and financial expertise are differentially significant in the going concern context indicating that these expertise types may temper management’s inclination to dismiss auditors after undesirable opinions.
JEL Classification Codes: M41, M42, M49.
References
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Al-Absy, M. S. M., Ismail, K. N. I. K., & Chandren, S. (2019). Audit committee chairman characteristics and earnings management. Asia-Pacific Journal of Business Administration.
Alhababsah, S., & Yekini, S. (2021). Audit committee and audit quality: An empirical analysis considering industry expertise, legal expertise and gender diversity. Journal of International Accounting, Auditing and Taxation, 42, 100377.
Archambeault, D., & De Zoort, F. T. (2001). Auditor opinion shopping and the audit committee: An analysis of suspicious auditor switches. International Journal of Auditing, 5(1), 33-52.
Audit Committee Leadership Network. (2012). Enhancing the audit committee report: A call to action. Retrieved from https://www.tapestrynetworks.com/sites/default/files/publication_pdf/Enhancing%20the%20audit%20committee%20report%20-%20A%20call%20to%20action.pdf
Audit Committee Leadership Network. (2014). Improving audit committee performance. Retrieved from https://www.tapestrynetworks.com/publications/improving-audit-committee-performance %2016%20October%202014%20-%20Final%20WEB.pdf
Audit Committee Leadership Network. (2019). Oversight of corporate culture. Retrieved from https://www.tapestrynetworks.com/publications/oversight-corporate-culture-0
Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Neal, T. L. (2009). The audit committee oversight process. Contemporary Accounting Research, 26(1), 65-122.
Bédard, J., & Gendron, Y. (2010). Strengthening the financial reporting system: can audit committees deliver? International Journal of Auditing, 14(2), 174-210.
Carcello, J. V., & Neal, T. L. (2000). Audit committee composition and auditor reporting. The Accounting Review, 75(4), 453-467.
Carcello, J. V., & Neal, T. L. (2003). Audit committee characteristics and auditor dismissals following “new” going-concern reports. The Accounting Review, 78(1), 95-117.
Carcello, J. V., Hermanson, D. R., Neal, T. L., & Riley, R. A. (2002). Board characteristics and audit fees. Contemporary Accounting Research, 19(3), 365-384.
Carcello, J. V., Hermanson, D. R., & Ye, Z. (2011). Corporate governance research in accounting and auditing: Insights, practice implications, and future research directions. Auditing: A Journal of Practice & Theory, 30(3), 1-31.
Center for Audit Quality. (2013). Enhancing the audit committee report: A call to action. Retrieved from https://www.thecaq.org/enhancing-audit-committee-report-call-action/
Certo, S. T., Lester, R. H., Dalton, C. M., & Dalton, D. R. (2006). Top management teams, strategy and financial performance: A meta‐analytic examination. Journal of Management Studies, 43(4), 813-839.
Chan, K. H., Lin, K. Z., & Mo, P. L. L. (2006). A political–economic analysis of auditor reporting and auditor switches. Review of Accounting Studies, 11(1), 21-48.
Chaudhry, N. I., Roomi, M. A., & Aftab, I. (2020). Impact of expertise of audit committee chair and nomination committee chair on financial performance of firm. Corporate Governance: The International Journal of Business in Society.
Cohen, J., Krishnamoorthy, G., & Wright, A. M. (2002). Corporate governance and the audit process. Contemporary Accounting Research, 19(4), 573-594.
Cohen, J., Hoitash, U., Krishnamoorthy, G., & Wright, A. (2014). The effect of audit committee industry expertise on monitoring the financial reporting process. The Accounting Review, 89(1), 243-273.
Contessotto, C., & Moroney, R. (2014). The association between audit committee effectiveness and audit risk. Accounting & Finance, 54(2), 393-418.
DeFond, M. L., Hann, R. N., & Hu, X. (2005). Does the market value financial expertise on audit committees of boards of directors? Journal of Accounting Research, 43(2), 153-193.
DeZoort, F. T. (1998). An analysis of experience effects on audit committee members' oversight judgments. Accounting, Organizations and Society, 23(1), 1-21.
DeZoort, F. T., Hermanson, D. R., Archambeault, D. S., & Reed, S. A. (2002). Audit committee effectiveness: A synthesis of the empirical audit committee literature. Audit Committee Effectiveness: A Synthesis of the Empirical Audit Committee Literature, 21, 38.
Dye, R. A. (1991). Informationally motivated auditor replacement. Journal of Accounting and Economics, 14(4), 347-374.
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, 301-325.
Ghafran, C., & Yasmin, S. (2018). Audit committee chair and financial reporting timeliness: A focus on financial, experiential, and monitoring expertise. International Journal of Auditing, 22(1), 13-24.
Haerem, T., & Rau, D. (2007). The influence of degree of expertise and objective task complexity on perceived task complexity and performance. Journal of Applied Psychology, 92(5), 1320.
Healy, P., & Lys, T. (1986). Auditor changes following Big Eight mergers with non-Big Eight audit firms. Journal of Accounting and Public Policy, 5(4), 251-265.
Hennes, K. M., Leone, A. J., & Miller, B. P. (2014). Determinants and market consequences of auditor dismissals after accounting restatements. The Accounting Review, 89(3), 1051-1082.
Landsman, W. R., Nelson, K. K., & Rountree, B. R. (2009). Auditor switches in the pre-and post-Enron eras: risk or realignment? The Accounting Review, 84(2), 531-558.
Lee, T & Stone, M. (2003). Economic agency and audit committees: responsibilities and membership composition. International Journal of Auditing, 1(2), 97-116, 2003.
Lee, H. Y., Mande, V., & Ortman, R. (2004). The effect of audit committee and board of director independence on auditor resignation. Auditing: A Journal of Practice & Theory, 23(2), 131-146
Martinov-Bennie, N., Soh, D., & Tweedie, D. (2015). An investigation into the roles, characteristics, expectations, and evaluation practices of audit committees. Managerial Auditing Journal, 30(8/9), 727-755.
Menon, K., & Williams, D. D. (2008). Management turnover following auditor resignations. Contemporary Accounting Research, 25(2), 567-604.
Naiker, V., Sharma, D. S., & Sharma, V. D. (2013). Do former audit firm partners on audit committees procure greater nonaudit services from the auditor? The Accounting Review, 88(1), 297-326.
NYSE Listed Company Manual. (2021). Section 3.Retrieved from http://nysemanual.nyse.com/LCM/Sections/
PCAOB Investor Advisory Group (IAG). (2012). The Sarbanes-Oxley Act ten years later: auditor independence, objectivity, and skepticism. IAG Working Group Presentation. Retrieved from https://pcaobus.org/News/Events/Documents/03282012_IAGMeeting/Independence_Obj ectivity_Working_Group_Report.pdf
PCAOB. (2020). Conversations with audit committee chairs: What we heard and FAQ. Retrieved from https://pcaobus.org/Documents/Conversations-with-Audit-Committee-Chairs.pdf
PricewaterhouseCoopers L. L. P. (2003). Audit committees: good practices for meeting market expectations. 2nd Ed. Retrieved from http://www.pwc.com/gx/en/ifrs-reporting/corporategovernance-publications audit-committees.jhtm
Public Oversight Board. (1993). A special report by the Public Oversight Board of the SEC Practice section, AICPA. Retrieved from https://egrove.olemiss.edu/cgi/viewcontent.cgi?article=1209&context=aicpa_assoc
Salleh, Z., & Stewart, J. (2013). Audit committee involvement in resolving contentious accounting issues: perceptions of chief financial officers, audit committee chairs and external auditors in Malaysia. International Journal of Accounting, Auditing and Performance Evaluation, 9(4), 326-343.
Sarbanes-Oxley Act (SOX). (2002). Public Law No. 107-204, 116 Stat. 745 Sec1-1107.
Securities and Exchange Commission (SEC). (2003). Final Rule: Standards relating to listed company audit committees. Release 33-8220.
Schmidt, J., & Wilkins, M. S. (2013). Bringing darkness to light: The influence of auditor quality and audit committee expertise on the timeliness of financial statement restatement disclosures. Auditing: A Journal of Practice & Theory, 32(1), 221-244.
Schwartz, K. B., & Menon, K. (1985). Auditor switches by failing firms. The Accounting Review, 248-261.
Shapiro, M.L.(Director)(2009, April 6). Address to the Council of Institutional Investors. Council of Institutional Investors Spring 2009 Meeting, Washington D.C. Retrieved from https://www.sec.gov/news/speech/2009/spch040609mls.htm
Spencer Stuart. (2014). Spencer Stuart Board Index. Retrieved from https://www.nyse.com/publicdocs/nyse/listing/Spencer_Stuart_Board_Index_2014.pdf.
Tanyi, P. & Smith, D. (2015). Busyness, expertise, and financial reporting quality of audit committee chairs and financial experts. Auditing: A Journal of Practice & Theory, 34(2), 59-89.
Teoh, S. H. (1992). Auditor independence, dismissal threats, and the market reaction to auditor switches. Journal of Accounting Research, 1-23.
Tuggle, C. S., Sirmon, D. G., Reutzel, C. R., & Bierman, L. (2010). Commanding board of director attention: investigating how organizational performance and CEO duality affect board members' attention to monitoring. Strategic Management Journal, 31(9), 946-968.
Weiss, D. J., & Shanteau, J. (2014). Who's the best? A relativistic view of expertise. Applied Cognitive Psychology, 28(4), 447-457.
Zmijewski, H. (1984). Methodological issues related to the estimation of financial distress prediction model. Journal of Accounting Research, 59-82.
Abbott, L. J., Parker, S., Peters, G. F., & Raghunandan, K. (2003). The association between audit committee characteristics and audit fees. Auditing: A Journal of Practice & Theory, 22(2), 17-32.
Al-Absy, M. S. M., Ismail, K. N. I. K., & Chandren, S. (2019). Audit committee chairman characteristics and earnings management. Asia-Pacific Journal of Business Administration.
Alhababsah, S., & Yekini, S. (2021). Audit committee and audit quality: An empirical analysis considering industry expertise, legal expertise and gender diversity. Journal of International Accounting, Auditing and Taxation, 42, 100377.
Archambeault, D., & De Zoort, F. T. (2001). Auditor opinion shopping and the audit committee: An analysis of suspicious auditor switches. International Journal of Auditing, 5(1), 33-52.
Audit Committee Leadership Network. (2012). Enhancing the audit committee report: A call to action. Retrieved from https://www.tapestrynetworks.com/sites/default/files/publication_pdf/Enhancing%20the%20audit%20committee%20report%20-%20A%20call%20to%20action.pdf
Audit Committee Leadership Network. (2014). Improving audit committee performance. Retrieved from https://www.tapestrynetworks.com/publications/improving-audit-committee-performance %2016%20October%202014%20-%20Final%20WEB.pdf
Audit Committee Leadership Network. (2019). Oversight of corporate culture. Retrieved from https://www.tapestrynetworks.com/publications/oversight-corporate-culture-0
Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Neal, T. L. (2009). The audit committee oversight process. Contemporary Accounting Research, 26(1), 65-122.
Bédard, J., & Gendron, Y. (2010). Strengthening the financial reporting system: can audit committees deliver? International Journal of Auditing, 14(2), 174-210.
Carcello, J. V., & Neal, T. L. (2000). Audit committee composition and auditor reporting. The Accounting Review, 75(4), 453-467.
Carcello, J. V., & Neal, T. L. (2003). Audit committee characteristics and auditor dismissals following “new” going-concern reports. The Accounting Review, 78(1), 95-117.
Carcello, J. V., Hermanson, D. R., Neal, T. L., & Riley, R. A. (2002). Board characteristics and audit fees. Contemporary Accounting Research, 19(3), 365-384.
Carcello, J. V., Hermanson, D. R., & Ye, Z. (2011). Corporate governance research in accounting and auditing: Insights, practice implications, and future research directions. Auditing: A Journal of Practice & Theory, 30(3), 1-31.
Center for Audit Quality. (2013). Enhancing the audit committee report: A call to action. Retrieved from https://www.thecaq.org/enhancing-audit-committee-report-call-action/
Certo, S. T., Lester, R. H., Dalton, C. M., & Dalton, D. R. (2006). Top management teams, strategy and financial performance: A meta‐analytic examination. Journal of Management Studies, 43(4), 813-839.
Chan, K. H., Lin, K. Z., & Mo, P. L. L. (2006). A political–economic analysis of auditor reporting and auditor switches. Review of Accounting Studies, 11(1), 21-48.
Chaudhry, N. I., Roomi, M. A., & Aftab, I. (2020). Impact of expertise of audit committee chair and nomination committee chair on financial performance of firm. Corporate Governance: The International Journal of Business in Society.
Cohen, J., Krishnamoorthy, G., & Wright, A. M. (2002). Corporate governance and the audit process. Contemporary Accounting Research, 19(4), 573-594.
Cohen, J., Hoitash, U., Krishnamoorthy, G., & Wright, A. (2014). The effect of audit committee industry expertise on monitoring the financial reporting process. The Accounting Review, 89(1), 243-273.
Contessotto, C., & Moroney, R. (2014). The association between audit committee effectiveness and audit risk. Accounting & Finance, 54(2), 393-418.
DeFond, M. L., Hann, R. N., & Hu, X. (2005). Does the market value financial expertise on audit committees of boards of directors? Journal of Accounting Research, 43(2), 153-193.
DeZoort, F. T. (1998). An analysis of experience effects on audit committee members' oversight judgments. Accounting, Organizations and Society, 23(1), 1-21.
DeZoort, F. T., Hermanson, D. R., Archambeault, D. S., & Reed, S. A. (2002). Audit committee effectiveness: A synthesis of the empirical audit committee literature. Audit Committee Effectiveness: A Synthesis of the Empirical Audit Committee Literature, 21, 38.
Dye, R. A. (1991). Informationally motivated auditor replacement. Journal of Accounting and Economics, 14(4), 347-374.
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, 301-325.
Ghafran, C., & Yasmin, S. (2018). Audit committee chair and financial reporting timeliness: A focus on financial, experiential, and monitoring expertise. International Journal of Auditing, 22(1), 13-24.
Haerem, T., & Rau, D. (2007). The influence of degree of expertise and objective task complexity on perceived task complexity and performance. Journal of Applied Psychology, 92(5), 1320.
Healy, P., & Lys, T. (1986). Auditor changes following Big Eight mergers with non-Big Eight audit firms. Journal of Accounting and Public Policy, 5(4), 251-265.
Hennes, K. M., Leone, A. J., & Miller, B. P. (2014). Determinants and market consequences of auditor dismissals after accounting restatements. The Accounting Review, 89(3), 1051-1082.
Landsman, W. R., Nelson, K. K., & Rountree, B. R. (2009). Auditor switches in the pre-and post-Enron eras: risk or realignment? The Accounting Review, 84(2), 531-558.
Lee, T & Stone, M. (2003). Economic agency and audit committees: responsibilities and membership composition. International Journal of Auditing, 1(2), 97-116, 2003.
Lee, H. Y., Mande, V., & Ortman, R. (2004). The effect of audit committee and board of director independence on auditor resignation. Auditing: A Journal of Practice & Theory, 23(2), 131-146
Martinov-Bennie, N., Soh, D., & Tweedie, D. (2015). An investigation into the roles, characteristics, expectations, and evaluation practices of audit committees. Managerial Auditing Journal, 30(8/9), 727-755.
Menon, K., & Williams, D. D. (2008). Management turnover following auditor resignations. Contemporary Accounting Research, 25(2), 567-604.
Naiker, V., Sharma, D. S., & Sharma, V. D. (2013). Do former audit firm partners on audit committees procure greater nonaudit services from the auditor? The Accounting Review, 88(1), 297-326.
NYSE Listed Company Manual. (2021). Section 3.Retrieved from http://nysemanual.nyse.com/LCM/Sections/
PCAOB Investor Advisory Group (IAG). (2012). The Sarbanes-Oxley Act ten years later: auditor independence, objectivity, and skepticism. IAG Working Group Presentation. Retrieved from https://pcaobus.org/News/Events/Documents/03282012_IAGMeeting/Independence_Obj ectivity_Working_Group_Report.pdf
PCAOB. (2020). Conversations with audit committee chairs: What we heard and FAQ. Retrieved from https://pcaobus.org/Documents/Conversations-with-Audit-Committee-Chairs.pdf
PricewaterhouseCoopers L. L. P. (2003). Audit committees: good practices for meeting market expectations. 2nd Ed. Retrieved from http://www.pwc.com/gx/en/ifrs-reporting/corporategovernance-publications audit-committees.jhtm
Public Oversight Board. (1993). A special report by the Public Oversight Board of the SEC Practice section, AICPA. Retrieved from https://egrove.olemiss.edu/cgi/viewcontent.cgi?article=1209&context=aicpa_assoc
Salleh, Z., & Stewart, J. (2013). Audit committee involvement in resolving contentious accounting issues: perceptions of chief financial officers, audit committee chairs and external auditors in Malaysia. International Journal of Accounting, Auditing and Performance Evaluation, 9(4), 326-343.
Sarbanes-Oxley Act (SOX). (2002). Public Law No. 107-204, 116 Stat. 745 Sec1-1107.
Securities and Exchange Commission (SEC). (2003). Final Rule: Standards relating to listed company audit committees. Release 33-8220.
Schmidt, J., & Wilkins, M. S. (2013). Bringing darkness to light: The influence of auditor quality and audit committee expertise on the timeliness of financial statement restatement disclosures. Auditing: A Journal of Practice & Theory, 32(1), 221-244.
Schwartz, K. B., & Menon, K. (1985). Auditor switches by failing firms. The Accounting Review, 248-261.
Shapiro, M.L.(Director)(2009, April 6). Address to the Council of Institutional Investors. Council of Institutional Investors Spring 2009 Meeting, Washington D.C. Retrieved from https://www.sec.gov/news/speech/2009/spch040609mls.htm
Spencer Stuart. (2014). Spencer Stuart Board Index. Retrieved from https://www.nyse.com/publicdocs/nyse/listing/Spencer_Stuart_Board_Index_2014.pdf.
Tanyi, P. & Smith, D. (2015). Busyness, expertise, and financial reporting quality of audit committee chairs and financial experts. Auditing: A Journal of Practice & Theory, 34(2), 59-89.
Teoh, S. H. (1992). Auditor independence, dismissal threats, and the market reaction to auditor switches. Journal of Accounting Research, 1-23.
Tuggle, C. S., Sirmon, D. G., Reutzel, C. R., & Bierman, L. (2010). Commanding board of director attention: investigating how organizational performance and CEO duality affect board members' attention to monitoring. Strategic Management Journal, 31(9), 946-968.
Weiss, D. J., & Shanteau, J. (2014). Who's the best? A relativistic view of expertise. Applied Cognitive Psychology, 28(4), 447-457.
Zmijewski, H. (1984). Methodological issues related to the estimation of financial distress prediction model. Journal of Accounting Research, 59-82.
Published
2021-06-25
How to Cite
Sawani, A. M. (2021). AUDIT COMMITTEE CHAIR CHARACTERISTICS, AND AUDITOR DISMISSAL IN A GOING CONCERN CONTEXT. International Journal of Accounting & Finance Review, 7(1), 53-73. https://doi.org/10.46281/ijafr.v7i1.1192
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
Copyright (c) 2021 Assma M. Sawani
This work is licensed under a Creative Commons Attribution 4.0 International License.
