The Time Dependence of Audit Firm Alumni Effects: Evidence from Audit Committees

Abstract

This article empirically examines the time dependence of audit quality and audit fee effects resulting from the presence of audit firm alumni (AFA) on audit committees (ACs) in the German setting. Following the European Union's audit reform in 2014, the subject of this study is of particular importance, as European regulators have strengthened the position of ACs, while simultaneously restricting the presence of AFA on ACs. We find that the presence of AFA who have recently left their former employer on ACs is associated with higher audit quality, while we fail to find a significant effect on audit quality with regard to AFA who have left audit firms a longer period of time ago. In addition, the presence of AFA on ACs does not seem to affect audit fees. To the best of our knowledge, this study is the first to demonstrate time-dependent AFA effects related to ACs.

The role of audit committee chair tenure—A German perspective

“…Ratio), and include a dummy that is equal to one when a firm made an acquisition during the fiscal year (Acquisition). The means of the abnormal accruals measures RQJ, RQMJ, and RQPM are À0.0049, À0.0046, and 0.0019, which is in line with prior studies (Baumann & Ratzinger-Sakel, 2020;Menon & Williams, 2004).…”

“…Also, Schmidt and Wilkins (2013) report that companies with AC chairs who have accounting financial expertise provide timelier disclosures, which is confirmed by Abernathy et al (2014). Therefore, as the AC chair is heavily involved in important issues related to the monitoring of the financial reporting and, as the primary contact of the external auditor, contributes to the audit process, the AC chair is able to affect (positively or negatively) financial reporting and audit quality (Baumann & Ratzinger-Sakel, 2020;Quick et al, 2008;Tanyi & Smith, 2015).…”

“…To analyse the association of AC chair tenure and reporting quality, I employ accrual models (AM) previously used in European settings (e.g., Baumann & Ratzinger-Sakel, 2020;Lesage et al, 2017). I control for industry and year fixed effects and cluster standard errors at the firm level.…”

“…1 In section D.II., the DCGK states that the AC is responsible for "monitoring [..] the accounting process, the effectiveness of the internal control system, the risk management system, the internal audit system, the audit of the financial statements and compliance." 2 In this context, a large body of research finds that the composition of the audit committee is associated with various proxies for financial reporting and audit quality (e.g., Badolato et al, 2014;Baumann & Ratzinger-Sakel, 2020;Bédard et al, 2004;Dhaliwal et al, 2010;Krishnan & Visvanathan, 2008), which underlines that the AC has a major role in monitoring the financial reporting and audit process and that specific characteristics of the AC determine its effectiveness.…”

Codetermination on the audit committee: An analysis of potential effects on audit quality

“…The AC has a major influence on the external audit and its quality (Baumann & Ratzinger‐Sake, 2020). First, the AC itself performs supervisory tasks within the company, which in particular include the supervision of the financial reporting process, the evaluation of the effectiveness of internal controls and the monitoring of the external and internal auditor (Section 2.D3 Deutscher Corporate Governance Kodex [DCGK], 2019).…”