Audit committee characteristics and auditor changes

This study investigates whether audit committee characteristics (independence, financial expertise, diligence, governance expertise, and firm-specific knowledge) recommended by the Blue Ribbon Committee (BRC) and widely supported by regulators are related to external auditor changes. Using a logistic model, we examine firms that changed auditors due to accounting disagreements, auditor resignation, fee disputes, and issuance of a qualified audit opinion. Our results indicate that auditor changes are less likely if audit committee members are more independent, have more financial expertise, and more firm-specific knowledge. When several of the recommendations of the BRC were adopted into law by the Sarbanes Oxley Act of 2002 (SOX), corporate executives and practitioners argued that the cost of these regulations far outweighed the benefits. An objective of this research is to identify a significant benefit of this regulation that results in an indirect effect on audit cost. We intend to show that audit committees, with the BRC characteristics, are less likely to change auditors. Prior research has shown that auditor changes can cause higher auditor fees and a temporary reduction in audit quality. In addition, SOX mainly directs attention to independent and financial expert audit committee members as critical to the effectiveness of the audit committee. This research extends the audit literature by examining a comprehensive set of auditor change variables and audit committee member characteristics. The significant findings of this study concur with the suggestions made by the BRC and SOX.