Home > Research > Publications & Outputs > The effect of governance on specialist auditor ...

Links

Text available via DOI:

View graph of relations

The effect of governance on specialist auditor choice and audit fees in U.S. family firms

Research output: Contribution to journalJournal article

Published
Close
<mark>Journal publication date</mark>11/2014
<mark>Journal</mark>The Accounting Review
Issue number6
Volume89
Number of pages33
Pages (from-to)2297-2329
Publication StatusPublished
Early online date30/05/14
<mark>Original language</mark>English

Abstract

Family firms are characterized by less separation between ownership and control
(Type 1 agency problem) but greater conflict of interest between controlling insiders and noncontrolling outside investors (Type 2 agency problem). Although strong board governance is known to decrease the Type 1 agency problem, its effectiveness in mitigating the adverse consequences of the Type 2 agency problem has not been well documented in the literature. We show that strongly governed family firms are more likely to choose specialist auditors and exhibit higher earnings quality than nonfamily firms. Weakly governed family firms demand lower audit effort and exhibit earnings quality that is no different from that of nonfamily firms.
Within family firms, we show that strongly governed family firms choose higher quality audits in the form of a greater use of specialist auditors and higher audit efforts, and exhibit higher earnings quality than other family firms. These findings provide consistent evidence that strong board governance can effectively mitigate the adverse consequences of the Type 2 agency problem on financial reporting and transparency in family firms.