Does Audit Committee Accounting Expertise Help to Safeguard Auditor Independence?

Abstract

In this study, we examine whether greater accounting expertise among audit committee members helps to safeguard auditor independence by encouraging auditors to be forthcoming in providing adverse internal control opinions when material weaknesses likely exist and by reducing the likelihood of auditor dismissal following adverse internal control opinions. Among clients with existing material weaknesses, we find a greater likelihood of adverse internal control audit opinions when the audit committee has greater accounting expertise (measured by the proportion of accounting experts on the audit committee). Among all clients, we find a lower likelihood of subsequent auditor dismissal following an adverse internal control audit opinion when the audit committee has greater accounting expertise, even in subsamples where the chief executive officer (CEO) likely wields greater influence over the audit committee. These findings have important implications for corporate nominating committees, especially in light of recent research suggesting that greater CEO influence over the audit committee can reduce audit committee effectiveness.

Keywords: audit committee; accounting expertise; internal control; auditor dismissal

JEL Classification: M41, M42