The role of audit committees in managing relationships with external auditors after SOX

Abstract

Purpose – Recent US reforms aimed at strengthening audit committees and their structure grant independent audit committees the responsibility to appoint, dismiss, and compensate auditors. The purpose of this paper is to examine the association between audit committee characteristics and auditors' compensation and dismissals following the enactment of the Sarbanes Oxley Act (SOX). Design/methodology/approach – A series of linear and logistic regression models were employed in a unique sample comprising of 2,393 observations. Findings – It was observed that stronger audit committees demand a higher level of assurance and are less likely to dismiss their auditors. Further, an increase was found in auditor independence as measured by reduced board involvement and less dismissals following an unfavorable audit opinion. Overall results suggest that increased audit committee roles and independence after SOX contribute to auditor independence and audit quality. Practical implications – This research has implications for regulators, auditors, boards and academics. The paper highlights that although all audit committees had to improve as a result of SOX, the remaining variation in audit committee characteristics continue to be important to the demand for auditor and audit quality. Originality/value – This study is the first to consider the association between audit committee characteristics and its extended responsibilities after SOX.