Audit committee effectiveness : an examination of audit committee composition and auditor switching

The purpose of this study is to examine the ability of the audit committee to effectively safeguard the independence of the external auditor by limiting the threat of dismissal that the auditor faces when issuing a going-concern-modified report. The effectiveness of the audit committee is measured by the frequency of auditor dismissals subsequent to the issuance of a new going-concern-modified report. This study posits that an audit committee will be more effective when it is composed of members who (1) are independent from management, (2) possess specific, technical knowledge regarding accounting and financial issues, and (3) have adequate time to devote to fulfilling their duties. The results of this study provide evidence of a relationship between certain aspects of audit committee composition and the likelihood that management would change auditors following the receipt of a going-concern- modified report. The results of the logistic regression model used in this study document a significant negative relationship between the independence of the audit committee and the likelihood that a client will switch auditors. However, results failed to provide evidence of a relationship between auditor switches and either the extent of audit committee members’ technical knowledge or the amount of time that audit committee members have available to perform their audit committee duties.