Clients' Competencies and Audit Quality: Evidence from Lead Independent Directors on the Audit Committee
53 Pages Posted: 9 Dec 2018 Last revised: 26 Sep 2022
Date Written: February 1, 2019
Abstract
This study examines whether lead independent directors serving on audit committees affect firms' audit outcomes by enhancing audit quality and audit efficiency. A lead independent director is a board position that companies voluntarily adopt to improve corporate governance or respond to corporate governance criticisms. The position’s responsibilities include facilitating communication between the other independent directors and CEOs, settling disputes between companies and key shareholders, and veto power over board agenda items. This study provides evidence that having lead independent directors serving on the audit committee can provide incremental benefits to the company. When a lead independent director also serves on the company's audit committee, the position links the audit committee, external auditor, and CEO, ensuring timely sharing of all audit-related issues, concerns, and suggestions. We find that companies with lead independent directors serving on the audit committee produce more timely and reliable information, especially companies with large audit committees or whose CEO tenure is short. Our study’s findings have practical implications for regulators about the possible effects of mandatory lead independent director adoption and for companies about the incremental benefits of having the lead independent director serve on the audit committee.
Keywords: lead independent director, audit committee, audit outcomes
JEL Classification: G30, M41, M42
Suggested Citation: Suggested Citation