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This paper focuses on bank audit committees and examines whether audit committee members who are former auditors are associated with the acquisition of audit and non-audit services from their former employers.

The study empirically examines a sample of large banks that are included in the S&P Composite 1500.

The paper reports significantly lower audit fees and a higher proportion of non-audit fees to total fees when the audit committee chair is an alumnus of the incumbent audit firm. Moreover, additional analysis reveals that these findings are stronger for banks with more earnings management.

Overall, the findings indicate that audit firms might consider banks using their alumni as audit committee chairs to be less risky or easier to audit, thus requiring relatively less effort from the auditors. The reduced effort required to audit clients with audit firm alumni on their audit committees then has the effect of reducing the audit fees charged. Alternatively, their auditing experience and cognitive proximity might influence the assessment of the need for auditing or the ability to negotiate lower audit fees on the part of audit firm alumni.

This paper provides empirical evidence of the association between audit firm alumni in influential positions on an audit committee and fees paid to those audit firms in the banking industry. The findings contribute to the literature by suggesting that banks with affiliated former auditors chairing their audit committees not only have significantly lower audit fees but also a higher proportion is spent on non-audit services.

The purpose of this paper is to examine the potential impact of two affiliation factors, as encapsulated by the chief financial officer's (CFO) prior organizational (alumnus vs non‐alumnus) and professional background (audit vs non‐audit ex‐partner), on auditor independence in post‐Enron and post‐HIH era.

The study is a 2×2 factorial between subjects experimental design with 52 audit partners and managers as participants. The two manipulated independent variables are client CFO prior firm affiliation (alumni vs non‐alumni) and professional background (audit partner vs non‐audit partner providing taxation, accounting and other non‐audit services).

The results of the study do not appear to signal loss of independence and professional skepticism in auditors' judgment when dealing with an alumni or ex‐auditor CFO. On average, auditors' endorsement of the client's preferred aggressive accounting treatment is low and the audit adjustment is material and significantly greater than the client's proposed adjustment.

The 2001 corporate collapses of Enron in the USA and HIH in Australia have reshaped the auditing profession. HIH, the most publicized corporate fraud in Australia resulting in estimated losses of $5 billion, was partly blamed on Arthur Andersen yielding to management's aggressive accounting policies and failure to display independence as a result of close relationships between the former partners and the audit team. As distinct from a number of prior studies conducted pre‐Enron and pre‐HIH, the results of this study, conducted with experienced audit professionals in Australia, do not support a loss of independence and professional skepticism by auditors in the current post‐Enron and post‐HIH environment and are consistent with the findings of the only other recent experimental study by Kerler III and Killough examining the closeness of the auditor‐client relationship. The results are also consistent with results of recent archival studies which find a decline in earnings management behavior, either because of reduced management incentives or reduced auditor willingness to consent. The evidence of this study lends supports to the latter explanation.

The purpose of this paper is to examine the effect of the psychological bond on behavioral loyalty (word‐of‐mouth, continuance and non‐audit services) to audit firms providing services to companies listed on the Polish Stock Exchange.

A model is proposed and tested using structural equation modeling with LISREL. Data were collected from top executives of companies listed on the Warsaw Stock Exchange.

The psychological bond has a positive effect on word‐of‐mouth, continuance and non‐audit services.

The current research is limited to the investigation of the psychological bond as an antecedent of behavioral loyalty in Poland. Future research should identify and assess other antecedents and replicate these across different countries. A longitudinal survey across different points in time might reveal more useful information about auditor‐client relationships.

Auditors need to consider ways in which they can develop the psychological bond with their clients. This bond is the basis for the client believing the audit firm is superior to others, which has been found to lead to behavioral loyalty in this study. In particular, management of the auditor brand and reputation, personal experience of the audit firm and alumni relations are discussed as ways of enhancing the psychological bond among client executives.

This study is the first to examine the impact of the psychological bond on behavioral loyalty in auditor‐client relationships.

This study examines perceptions of auditor independence (AI) and financial reporting quality (FRQ) when former auditors are hired by public companies into accounting oversight positions under differing strengths of corporate governance. Although the Sarbanes–Oxley (SOX) mandate of a one-year cooling-off period for the hiring of former audit engagement team members into accounting oversight positions (e.g., chief financial officer) may enhance perceptions of AI, it potentially sacrifices FRQ by restricting the hiring of candidates most familiar with a particular company's industry, risks, and controls. The results of this experiment suggest when a company (i) has strong corporate governance and (ii) hires an audit engagement team member without a one-year cooling-off period, stakeholders perceive financial statement quality to be highest as compared to all other experimental conditions. Interestingly, we also find hiring a former auditor who has not cooled-off one-year results in roughly the same perception of AI as hiring an auditor observing the one-year cooling-off requirement. Collectively, results suggest stakeholders may not perceive a benefit from the cooling-off requirement as independence is not viewed as enhanced and FRQ is viewed as diminished. Requiring disclosure of auditor alumnus hires, in lieu of a mandated cooling-off period, coupled with external measures of companies’ strength of corporate governance may be sufficient to protect AI and FRQ.

This study aims to examine trends in audit committee characteristics of companies and associates characteristics subject to major change with a fee-based proxy for audit committee effectiveness.

The research adopts an empirical approach. Using descriptive and inferential statistics, observations for 253 Financial Times Stock Exchange 350 companies’ audit committee characteristics gathered from annual reports at the beginning and end of a five-year period are evaluated against averaged non-audit fees (NAF) as a proportion of total audit fees.

Audit committee composition shows an increased incidence of female membership and of members with previous audit experience. The increase in members with previous audit experience is more marked where this is gained with the incumbent auditor. An increase is also shown in chief financial officers with previous audit experience. Previous audit experience is associated with reduced NAF as a proportion of total fees. This is marked where audit experience has been gained with the incumbent auditor. These results suggest that the benefits of financial expertise gained from audit experience outweigh impairments to independence due to social ties. Nevertheless, other studies indicate concerns about independence are still well-founded.

This paper’s original contribution is to evaluate the potential effect of previous audit experience on those involved in audit committees in light of concerns raised in the literature and by regulators that external auditor independence should be maintained. The innovative fee-based proxy for audit committee effectiveness facilitates an evaluation as to which influence prevails.

The results of recent research suggest that certain provisions of the Sarbanes–Oxley Act of 2002 (SOX) may have been less successful than intended (e.g., Abbott, Parker, & Peters, 2009). Based on two different descriptions of economic bonding between auditors and their clients, we propose an explanation of why this might be so by showing that the effect of SOX mandates, and regulation in general, aimed at enhancing auditor independence is dependent on whether shareholders or managers monitor the auditor. The results of prior empirical studies are examined in context of the framework we describe, and suggestions for future research on this important topic are outlined.

The purpose of this study is to examine the association between audit partners’ signing networks and accruals quality, using the sample of Taiwanese publicly traded companies.

This study uses four centrality measures as proxies in this study for the strength of the audit partners’ relationship networks and the absolute value of discretionary accruals to measure accruals quality.

Using the sample of publicly traded firms audited by the Big 4 accounting firms in Taiwan during the 2011–2017 period, this study finds that the centrality of an audit partner’s signing network is negatively associated with the absolute value of discretionary accruals. The result is robust to various discretionary accruals measures and survives the alternative explanation related to the endogenous matching between audit partners and their clients.

This study contributes to the understanding of the effect of the relationship network within an accounting firm on accruals quality. This is one of the few studies to empirically examine the strength of the audit partners’ relationship network as a factor in firms’ financial reporting quality, especially by using the sample from an emerging market. This study shows that the strength of the audit partners’ signing networks contains incremental information when assessing firms’ earnings quality. High-quality audit work is important to ensure high-quality financial reporting and the results of this study highlight that audit partners’ network linkages affect the quality of their work.

This paper aims to review 68 archival studies on the impact of audit committees (ACs) on firms’ consequences [(non)financial reporting, performance and audit quality] in European firms.

Applying a stakeholder agency-theoretical framework, the author differentiates between three categories of AC variables: presence; composition; and resources, incentives and diligence.

The author finds that AC composition, (non)financial reporting and audit quality are dominant in the literature review. Other inputs or outputs are either too low in amount or yielded heterogeneous results, hindering clear tendencies. However, there are indications that financial expertise is positively related to financial reporting and audit quality, in line with agency theory and European regulatory assumptions.

In the discussion of potential future research, the author emphasizes, among others, the need for the recognition of innovative and sustainable AC variables, inclusion of moderator and especially mediator variables and reaction to endogeneity concerns by advanced regression models.

As the European Commission currently discusses extended regulations on AC duties and composition, this literature review highlights the huge impact of financial expertise on financial reporting and audit quality. In view of the increased monitoring duties of sustainability reporting, both business practices and regulatory bodies should increase the sustainability expertise of ACs.

This analysis makes useful contributions to prior research by focusing on attributes of AC and their impact on firms’ outputs in the European capital market, based on a differentiation between mandatory one-tier/two-tier systems and the choice model. The findings support the promotion of European evidence-based regulations, such as the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive.

This study aims to review the auditor-client relationship (ACR) literature spanning 1976 to 2019 to provide future research directions.

The study analysed 140 articles from the Web of Science database, authored by 259 scholars across 28 countries and published in 47 journals. It identified three major research streams to understand the ACR dynamics: auditor tenure, ACR attributes and auditor-client negotiation.

Three major findings emerged based on this review. First, few studies examine auditor-client negotiation relative to other streams; thus, it offers scope for further research. Second, given that various fields have used diverse frameworks as theoretical underpinnings in prior studies, continuing this trend can better portray ACR from multiple perspectives. Finally, despite strong international regulations on ACR aspects such as auditor independence, tenure and rotation, implementation in several countries warrants special considerations, specifically on legal enforcement and investor protection, given diverse cultures and country-level institutional environments.

This study contributes to the synthesis of existing and emerging research streams and provides future research suggestions.

The purpose of this study is to examine the role of ethnic similarity in the audit partner–client manager relationship and its impact on auditor selection and retention decisions.

The authors use name matching analysis to infer ethnicity of audit partners and client managers in the US nonprofit reporting environment. The authors examine the degree of ethnic similarity (co-ethnicity) between the two parties and model auditor selection and retention decisions as a function of co-ethnicity. The authors also model reporting attributes as a function of co-ethnicity.

The authors find that the ethnic similarity between the client manager and their external audit partner is a significant determinant of auditor-client alignment. Specifically, the authors find that clients are more likely to select and retain an audit partner who is ethnically similar to the client manager. The authors find that co-ethnicity is associated with a lowered propensity to issue a going concern opinion to a financially distressed client and an increased occurrence of underreporting of fundraising and administrative expenses.

Taken together, the evidence suggests that ethnic diversity (the opposite of co-ethnicity) in the auditor-client relationship is associated with higher audit quality. These findings are relevant to client managers, audit committees and public accounting firms as they make auditor selection and reporting decisions.

Prior studies have found that co-ethnicity influences the formation and future success of various business partnerships. The auditor-client relationship is a unique setting within the business environment where the two parties must balance their desire to maintain a close relationship with their need to maintain independence. The study is the first to examine the role of ethnicity in the auditor-client relationship.