Changing the Audit Committee Chair: An Analysis of Potential Effects on Audit Quality and Audit Fees

Abstract

This paper examines the association between changes of the audit committee (AC) chair on audit quality and audit fees. We find that changes of the AC chair are negatively associated with audit quality. This finding indicates that firm-specific knowledge and task-related experience have an impact on audit quality. Furthermore, AC chair changes are positively associated with audit fees. Specifically, audit fees are approximately 7.14 percent higher following a change of the AC chair. However, our analyses show that our findings depend on the accounting experience of the former AC chair. Thus, if the former AC chair has no accounting experience, the negative effect of AC chair changes on audit quality turns insignificant, which indicates that former AC chair’s firm-specific knowledge and task-related experience only improve the effectiveness of the AC when the former AC chair has simultaneously accounting expertise. This result highlights the importance of accounting expertise for AC chair´s monitoring effectiveness. Similarly, if the former AC chair has accounting experience, the effect on audit fees turns insignificant. We, therefore, conclude that new AC chairs are aware of the supervisory shortcomings of former AC chairs without accounting expertise, and, thus, demand a greater degree of audit procedures from the external auditor resulting in higher audit fees. However, it appears that the extension of audit procedures cannot compensate for the monitoring shortcomings associated with the change of the AC chair and, thus, for the decrease of audit quality.