A Matter of Appearances: Does Financial Expertise Help Audit Committees Look Beyond the Superficial When Selecting and Compensating Auditors?

Abstract

Although prior research has claimed that audit committees with more expertise secure better auditors and enjoy higher quality earnings, a deeper understanding of this premise compels consideration of the factors that less-expert audit committees consider when choosing auditors if indeed they are less sensitive to auditor quality. Drawing on newly mandated PCAOB Form AP disclosures of audit partners’ identities, we examine the premise that less-expert audit committees are more likely to be influenced by auditors’ superficial characteristics, which we proxy by obtaining independent ratings of audit partners’ physical appearances. We find that audit committees with fewer financial experts tend to engage more attractive audit partners and pay attractive audit partners a differential fee premium. These findings support the view that expertise helps audit committees by mitigating the influence of superficial characteristics in auditor selection and compensation decisions.