Audit committee returnees and auditor choice: evidence from China

Abstract

Purpose

The purpose of this paper is to examine whether the presence of returnees serving on the audit committee affects auditor choice in emerging markets.

Design/methodology/approach

Using a logistic model, this study tests the relationship between the presence of returnees in the audit committee and auditor selection and how this relationship varies with the level of agency costs. The authors also perform several other additional analyses to ensure the robustness of the results, including propensity score matching, Heckman’s two-stage model and change analysis.

Findings

Using A-share listed companies in China from 2008 to 2016, the authors find a positive association between the presence of audit committee returnees and a demand for high-quality auditors and such association is strengthened in firms with a higher level of agency costs. The authors further find that discretionary accruals and the incidence of financial restatements are lower in firms with audit committee returnees.

Research limitations/implications

Although this study focuses on audit committee members with foreign study or foreign work experience, it remains to be seen if similar effects could be achieved through foreign ownership or work experience with foreign customers or suppliers.

Originality/value

This study provides evidence on a new channel of international knowledge spillover through which the emigration of talent increases board monitoring by demanding high-quality auditors in an emerging economy.

Citation

Zhou, Z., Wang, H. and Cheng, X. (2020), "Audit committee returnees and auditor choice: evidence from China", Asian Review of Accounting, Vol. 28 No. 4, pp. 635-663. https://doi.org/10.1108/ARA-05-2020-0063