Audit committee director-auditor interlocking, audit pricing and industry specialisation

Xiaolu Xu and Susan M. Albring

International Journal of Corporate Governance, 2018, vol. 9, issue 4, 428-461

Abstract: This study examines the relation between audit committee director-auditor interlocking and audit fees, as well as the effect of auditor industry specialisation on this relation. Using a sample of S%P 1,500 firms in the USA during the years 2004-2014, we find a positive relation between audit committee director-auditor interlocking and audit fees only for firms that select industry specialist auditors. Firms that select non-industry specialist auditors pay lower audit fees compared to the control firms which do not have either interlocked audit committees or interlocked audit committees through director-auditor links. The findings are robust after controlling for sample selection bias and unobserved omitted variables and using alternative measures of audit committee director-auditor interlocking. Additional analyses show that firms with audit committee director-auditor interlocking are more likely to select industry specialist auditors. These results indicate that audit committees with director-auditor interlocking demand high quality audits and extensive audit coverage due to reputation effects only when the selected auditors have higher reputational cost and more bargaining power.

Keywords: audit committee director-auditor interlocking; audit fees; auditor industry specialisation; USA. (search for similar items in EconPapers)
Date: 2018
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