The Impact of the Auditor Selection Process and Audit Committee Appointment Power on Investment Recommendations

SUMMARY After the global 2007–2008 financial crisis, regulatory bodies proposed alternative auditor selection processes to enhance auditor independence such as mandatory audit firm rotation or mandatory tendering (i.e., rotation that allows for the current auditor to be reappointed). However, these alternative selection processes may not be effective if management has substantial influence over auditor appointment decisions. We posit that disclosures of high appointment power of the audit committee will enhance the perceived effectiveness of rotation and tendering, and thus increase investment recommendations. In an experimental study involving 118 experienced investment professionals, we examine the impact of the auditor selection process (mandatory rotation, mandatory tendering, and voluntary selection) and the appointment power of the audit committee (high, low) on investment recommendations. We find that audit committee appointment power affects investment recommendations only when a possible auditor change is anticipated (i.e., in the case of rotation and tendering), but not when the auditor selection is voluntary. Further, rotation and tendering lead to a higher recommended investment likelihood than voluntary selection, but only when an audit committee has high appointment power. In all, the findings underscore that investors do not view auditor selection processes in isolation of a company's internal corporate governance mechanisms. JEL Classifications: M42; M48; G11.

Companies Act and Corporate Governance in India: Quo Vadis?

The theoretical framework of the paper draws from institutional economics and conceptual framework of corporate governance is derived from incomplete contract among various stakeholders in a firm. Three institutions stand at the center of a capitalist economy: private property, markets, and the Rule of Law. Capitalism depends on the Rule of Law to prohibit coercion and fraud. Without the Rule of Law, long-term agreements and contracts cannot be provided by market, because people could not be prevented from dealing dishonestly with each other. It is in this context, we set out to examine critically evaluate the present form of Companies Act and its implications for corporate governance The paper analyses certain provisions in the Companies Act 2013 that will improve corporate governance by reducing conflicts at various levels. However, certain problem areas remain. They include incorporation of clause 49 in the Articles of Association, developing and incorporating company policy specific provisions under the model of corporate governance, fully independent audit committee, appointment of chief ethics officer, setting up independent committee on corporate governance issues, rotation of external auditors, number of independent directors, significant reduction in the number of companies of which a person can be director.

On Audit Committee Appointments

This study examines determinants of audit committee appointment by comparing characteristics of 262 nonexecutive directors appointed to corporate audit committees between 1995 and 1998 with characteristics of 262 nonexecutive, age-matched control directors. The likelihood of audit committee appointment is found to increase with the degree of outside director independence, and decrease with compensation committee membership, other committee memberships, and the length of board tenure. Importantly, audit committee appointments are unrelated to the amount of stock owned by directors and the number of other directorship posts they hold. Together, these results highlight several director attributes beyond affiliation that could be important in guiding director decisions and suggest the need for further research toward understanding the quality of audit committee appointments.