Agency costs and auditor choice: moderating role of board’s expertise and internal control

Abstract

Purpose

This study aims to examine the effects of agency cost on auditor choice. This paper also deals with the moderating role of the board’s financial expertise (Bfe) and the status of the internal control (Intecon) system on the relationship between agency cost and auditor selection.

Design/methodology/approach

This study’s sample consists of 1,040 firm-year observations of Iranian nonfinancial companies listed on the Tehran Stock Exchange from 2012 to 2019. The information required for this research is mainly extracted from Comprehensive Database of All Listed Companies (in Iran Stock Exchange). Data from 130 companies were obtained during the research period. This study used logistic regression to test the hypotheses.

Findings

The findings indicate that companies with higher agency costs choose the auditor from lower classes. As the proportion of financial expert members on the board increases, the intensity of this relationship will be reduced. Companies with higher agency costs choose the auditor from the lower classes, but the higher the ratio of financial expert board members, the more these companies will choose high-quality auditors. However, findings showed that the status of the Intecon system has no moderating effect on the relationship between agency costs and auditor selection.

Originality/value

The results of this study can expand the existing literature on the relationship between auditor selection and agency costs and the factors affecting this relationship, especially the Bfe and Intecon. This research has significant suggestions for regulators, stakeholders, shareholders and analysts in emerging economies that may encounter similar contextual implications.

Citation

Behbahaninia, P.S. (2022), "Agency costs and auditor choice: moderating role of board’s expertise and internal control", Journal of Financial Reporting and Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFRA-11-2021-0406