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Purpose The purpose of this study is to examine the effect of audit committee (AC) tenure on corporate governance, a topic that has been long debated. Social capital theory explains how directors’ effectiveness varies through tenure. Consistent with this theory, this paper argues that AC tenure has an inverted U-shaped relationship with AC governance. Design/methodology/approach This paper estimates a quadratic function that regresses constructs for AC governance on the average AC, the AC chair, and nonchair tenure, and their respective square terms. The constructs for AC governance include financial reporting quality measures and perceived auditor independence measures. Findings This paper finds that average AC, AC chair, and nonchair tenure have inverted U-shaped relationships with financial reporting quality, consistent with social capital theory. This paper also finds similar associations when examining perceived auditor independence. The results are generally consistent with AC directors accumulating knowledge and social capital, which improves AC governance to an optimal level, following which entrenchment and familiarity occur and AC governance declines. Originality/value To the best of the authors’ knowledge, this is the first study in AC governance literature to show a nonlinear relationship between AC tenure and AC governance. This paper extends Huang and Hilary (2018) by demonstrating that a nonlinear effect is also present in the AC, a key board committee responsible for monitoring financial reporting quality and appointing auditors and approving their services. This paper further documents that the AC subsumes the effect of the overall board in some areas of AC oversight, and reconciles the inconclusive findings of prior research by showing a nonlinear relationship between AC tenure and AC governance.

This study investigates whether audit litigants act as if they believe jurors will associate auditor-provided nonaudit services (NAS) with impaired auditor independence, and thus substandard auditor performance. Using GAAP-based financial statement restatements disclosed from 2001–2007 as an indicator for audit failure, I find that the amount of NAS fees and the ratio of NAS fees to total fees is positively associated with the likelihood that a restatement results in audit litigation. I also find that when plaintiff attorneys argue that auditor independence was impaired due to dependence on client fees and, in particular, NAS fees, restatement-related audit litigation is more likely to result in an auditor settlement and a larger amount of settlement. These results suggest that audit litigants act as if they believe NAS fees will strengthen the case against the auditor, and thus affect the court resolution if the lawsuit is taken to verdict.

PurposeThis study aims to investigate whether gender diversity in audit committees affects the purchase of nonaudit services in China. Results from family and nonfamily firms are compared and the critical mass participation of females are further examined.Design/methodology/approachThe sample comprises 1,834 Chinese listed companies from 2012 to 2021, among which 910 are family firms. The Heckman (1979) two-stage model is used to mitigate the potential endogeneity issue in the selection of gender diversity. Propensity score matching is also used to further alleviate the endogeneity problem in relation to family firms.FindingsResults show a significant and negative correlation between the gender diversity in audit committees and nonaudit service fees. This association is more apparent in nonfamily than in family firms. Findings are consistent and robust to endogeneity tests and sensitivity analyses. The analysis of critical mass and symbolic participation shows that three female directors can more significantly restrain nonaudit fees than one to two females on the board.Practical implicationsThis study contributes to literature on resource dependence theory, which posits that audit committees help enterprises establish contact with auditors, improve the company legitimacy, assist in communication and provide relevant expertise. This study also relates to agency theory, which holds that differences in the severity of types I and II agency problems between family and nonfamily firms lead to differences in auditor selection and related costs.Originality/valueExtending from previous research on the relation between the gender diversity in audit committees and nonaudit fees, the present study delves into this connection within the context of China, an emerging economy. As a result, this investigation offers novel insights and expands upon current knowledge. In addition, the correlation between the gender diversity of audit committees and nonaudit fees is explored for family and nonfamily firms.

Companies are under increasing pressure to manage their reputation on environmental, social, and governance (ESG) issues. Auditors are a potential source of ESG risk management expertise and assurance due to a deep understanding of their client’s ESG-related reputation risk (“ESG risk”) and their assurance reporting expertise. However, provision of nonaudit services by the external auditor is controversial and public accountants are still defining their role in ESG risk control and reporting. We explore whether auditors help companies manage heightened ESG risk in times of reputation crisis, using abnormal negative ESG-related media coverage as a measure of “tainted reputation.” Findings show a positive association between tainted reputation and nonaudit services and between the interaction of tainted reputation and nonaudit services with future firm value. The positive interaction persists when we consider a proxy for other ESG risk management activities in our analyses and for other measures of ESG risk management effectiveness (future stock returns and future tainted reputation). Subsample analyses indicate that results are driven by companies audited by ESG industry specialist auditors, that the association between tainted reputation and nonaudit services is driven by companies owned by institutional shareholders, and that inferences from our results may not hold when ESG risk is dominated by its social component. Using restatements as a proxy, we find no evidence to suggest that the interaction of tainted reputation and nonaudit services is associated with impaired audit quality. Findings demonstrate an empirical linkage between tainted reputation and nonaudit services that is positively associated with future firm value measures.

The Sarbanes-Oxley Act of 2002 (SOX) effectively bars an auditor from providing nonaudit services to an audit client based on the belief that the resulting economic bonding undermines the auditor's independence and quality of the audit (U.S. House of Representatives 2002). The accounting profession has strongly debated this view and counter-argues that auditor-provided nonaudit services benefit the client. We contribute to this debate by examining the effect of auditor-provided nonaudit services on the effectiveness and efficiency of the audit. We find that higher nonaudit service fees are associated with shorter audit report lags—a potential indicator of audit efficiency—prior to the passage of SOX, but such effects dissipate after SOX. We find that discretionary accruals and financial restatements—potential indicators of audit effectiveness—do not increase when shorter audit lags occur in conjunction with high nonaudit service fees. We also find that the firms with the highest levels of nonaudit service fees prior to SOX have the largest increase in audit lags after SOX. These results suggest that there is some merit to the profession's argument that auditor-provided nonaudit services benefit clients without leading to a loss of audit effectiveness. Data Availability: All data are publicly available from sources identified in the text.

We investigate the relationship between audit fees and subsequent financial statement restatements in the years following the Sarbanes-Oxley Act of 2002 (SOX). After controlling for internal control quality, we find that abnormal audit fees are negatively associated with the likelihood that financial statements are subsequently restated. This result conflicts with prior work that finds that audit fees are positively associated with future restatements. Overall, our evidence is consistent with the notion that restatements reflect low audit effort or underestimated audit risk in the periods leading up to the restatement year.

This study examines whether and how audit quality proxied by the magnitude of absolute discretionary accruals is associated with abnormal audit fees, that is, the difference between actual audit fee and the expected, normal level of audit fee. The results of various regressions reveal that the association between the two is asymmetric, depending on the sign of the abnormal audit fee. For observations with negative abnormal audit fees, there is no significant association between audit quality and abnormal audit fee. In contrast, abnormal audit fees are negatively associated with audit quality for observations with positive abnormal audit fees. Our findings suggest that auditors’ incentives to deter biased financial reporting differ systematically, depending on whether their clients pay more than or less than the normal level of audit fee. Our results are robust to a variety of sensitivity checks.

We propose that auditor-provided tax services (tax NAS) improve internal control quality by accelerating audit firm awareness of transactions material to the financial statements. Using data from 2004 to 2012, we find robust evidence that companies purchasing tax NAS are significantly less likely to disclose a material weakness and that this result is not due to auditor independence impairment. A one-standard-deviation increase in tax NAS is associated with approximately a 13 percent decrease in the rate of material weaknesses relative to the base rate. These results are robust to tests addressing endogeneity concerns. Additional cross-sectional analyses reveal expected increased effects of tax NAS on internal control quality (1) after significant operational changes that require changes to the internal control structure, and (2) earlier in the relationship with the financial statement audit firm, when there are fewer established lines of communication between the audit team and client. This paper contributes to the knowledge spillover literature by identifying a mechanism through which tax NAS improve overall financial reporting quality.

Purpose The COVID-19 pandemic has introduced new challenges for auditors to provide high-quality audits. These challenges pose interesting questions about the ability of auditors to obtain audit evidence and ensure appropriate conclusions. In response to these questions, this paper aims to examine how self-efficacy affects the auditors’ effort and performance during COVID-19 and how remote audit proficiency helps them respond to these challenges, as reflected in more effort and high-quality performance. Design/methodology/approach To test the hypotheses, this study used a quantitative approach in which 193 Saudi auditors were surveyed and partial least squares structural equation modeling was used to analyze the data. Findings The authors demonstrated that self-efficacy is positively associated with the perceived audit effort and performance during the COVID-19 crisis. The results also showed that remote audit proficiency plays a significant role during COVID-19 as it can help auditors exert more effort and perform audit activities effectively. This study also found that remote audit mediates the association between self-efficacy and both effort and performance during COVID-19. These results are also asserted under several robust analyses. Originality/value To the best of the authors’ knowledge, these findings provide the first evidence on the effect of COVID-19 on auditors and have implications for both theory and practice.

We use experimental markets to examine whether providing consulting services to a non-audit client impacts audit quality. Our paper directly addresses concerns raised by the Public Company Accounting Oversight Board that the largest public accounting firms' growth in their consulting practices threatens audit quality. We conduct an experiment proposed using a registration-based editorial process. We compare a baseline where the auditor does not provide consulting services to conditions where auditors provide consulting to audit clients or where auditors only provide consulting services to non-audit clients. Our unique design provides evidence on whether providing consulting to non-audit clients strengthens the salience of a client-cooperative social norm that reduces audit quality. We do not find differences in audit quality by condition in our planned analysis, however we find greater variation in audit quality in the conditions where auditors provide consulting services compared to the baseline. In unplanned analyses, our results suggest providing consulting services increases auditor cooperation with managers, increasing audit quality when managers prefer high audit quality and decreasing audit quality when managers prefer low audit quality.