The Effects of Prior Manager-Auditor Affiliation and PCAOB Inspection Reports on Audit Committee Members' Auditor Recommendations

ABSTRACT This study investigates (1) the extent to which audit committee members (ACM) of small publicly traded companies utilize Public Company Accounting Oversight Board (PCAOB) inspection reports in their auditor selection recommendations when management recommends hiring the auditor, and (2) whe...

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Bibliographic Details
Published in:	Behavioral research in accounting 2016-01, Vol.28 (1), p.1-14
Main Authors:	Abbott, Lawrence J., Brown, Veena L., Higgs, Julia L.
Format:	Article
Language:	eng
Subjects:	Audit committees Financial reporting Inspections Personnel selection Public Company Accounting Reform & Investor Protection Act 2002-US Studies
Online Access:	Get full text
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Summary:	ABSTRACT This study investigates (1) the extent to which audit committee members (ACM) of small publicly traded companies utilize Public Company Accounting Oversight Board (PCAOB) inspection reports in their auditor selection recommendations when management recommends hiring the auditor, and (2) whether the Sarbanes-Oxley Act's mandated one-year cooling-off period mitigates independence concerns of ACM resulting from a prior management-auditor affiliation in the same auditor selection context. We use financially literate professional participants as proxies for ACM who make a Likert-scale based recommendation for hiring the auditor. Our study manipulates a hypothetical, triennially inspected auditor's inspection results (favorable/unfavorable) as an auditor competence indicator and a prior management-auditor affiliation (present/absent) as an auditor independence indicator. We document that participants incorporate the inspection results into their selection recommendations, that prior affiliation negatively impacts ACMs' selection recommendations, and that auditor independence effects are contingent upon auditor competence. More specifically, auditor independence impacts auditor selection decisions only when auditor competence is favorable.
ISSN:	1050-4753 1558-8009