“Audit Committee-Auditor Interlocking, Auditor Turnover and Audit Quality” by Ms. Yangyang FAN
Ms. Yangyang FAN
Ph.D. Candidate in Accounting
Joseph M. Katz Graduate School of Business
University of Pittsburgh
This study examines whether interlocks between auditors and audit committee members (AC-auditor interlocking) affect the likelihood of auditor dismissal when there is a financial restatement and how an auditor dismissal affects the subsequent audit quality for interlocking companies. Empirical evidence shows that companies are less likely to dismiss their auditors after the restatements occur if at least one of their audit committee members works on the audit committee of another company that is audited by the same audit firm. Further evidence suggests that auditor dismissals following accounting restatements positively affect audit quality of the companies with AC-auditor interlocking, indicating that not dismissing auditors following restatement potentially damages companies’ audit quality. These findings raise concerns about the audit committee’s role in auditor termination when audit quality is relatively low and suggest that AC-Auditor interlocking may impair future audit quality by failing to replace the incumbent auditors.