Audit Committee Influence on Audit Firm Selection and Retention

Accounting researchers and practitioners have expressed the need to better understand the interactions between audit committees and external auditors (CAQ 2013; DeFond and Zhang 2014). We examine these interactions through the lens of management theory. The attraction-selection-attrition (ASA) theory of employer-employee relationships suggests that the initiation and length of these relationships are affected by similarities between employers (i.e., audit committee) and employees (i.e., audit firm). Social integration also suggests that cohesion, or fit, among co-workers improves performance. Consistent with these theories, we find that companies with a former Big 4 partner on their audit committee are more likely to hire the committee member’s former firm and less likely to switch away from the member’s former firm than companies without this affiliation. We also find evidence that former partners have preferences when considering other large audit firms as the external auditor and these preferences manifest themselves in the audit firm hiring decision. Finally, we find evidence that having an affiliated audit committee member increases audit quality, with no evidence that affiliated audit committees give the audit firm inappropriate preferential treatment.