Choosing an external auditor: does the composition of boards of directors matter?

Abstract

Purpose

This paper aims to investigate the association between the composition of boards of directors and the choice of external auditor among companies listed on the Kuwait Stock Exchange (KSE) in 2013.

Design/methodology/approach

Consistent with prior research, audit quality is represented by two proxies, namely, a Big 4 and Non-Big 4 audit firm. Independence, diversity, interlocks, size and role duality are used as proxies for board composition. To accommodate the dichotomous dependent variable (auditor choice), a logistic regression model is used to test the hypothesized associations between board composition and auditor choice.

Findings

After controlling for firm-specific characteristics, results show that independence, diversity and size are statistically significant and increase the likelihood that a KSE-listed company selects a high-quality (Big 4) audit firm. Role duality is also statistically significantly but decreases the likelihood of choosing a Big 4 audit firm.

Practical/implications

This research has implications for regulators, shareholders, boards and academics. The paper underlines the importance of the composition of the board in increasing the likelihood of hiring a high-quality audit firm. Regulators can draw upon these results when assessing the effectiveness of corporate governance mechanisms.

Originality/value

This paper is among the first to study the association between auditor choice and board composition using data from the frontier market of Kuwait, thus responding to the call for empirical research into the issue in less-developed markets. Overall, it sheds light on the effectiveness of board composition and provides empirical evidence that it is an important element in the choice of auditors. The findings indicate that board composition may be a mechanism that can promote demand for high audit quality.

Citation

Alfraih, M.M. (2017), "Choosing an external auditor: does the composition of boards of directors matter?", International Journal of Law and Management, Vol. 59 No. 3, pp. 394-412. https://doi.org/10.1108/IJLMA-03-2016-0032