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

Bin N. SRINIDHI, Shaohua HE, Michael Arthur FIRTH

Research output: Journal PublicationsJournal Article (refereed)

27 Citations (Scopus)

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 non-controlling 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.
Original languageEnglish
Pages (from-to)2297-2329
Number of pages33
JournalThe Accounting Review
Volume89
Issue number6
Early online dateJun 2014
DOIs
Publication statusPublished - Nov 2014

Fingerprint

Family firms
Auditor choice
Audit fees
Governance
Agency problems
Earnings quality
Auditors
Audit effort
Financial transparency
Quality audit
Insider
Ownership and control
Investors
Conflict of interest
Financial reporting

Bibliographical note

Michael Firth acknowledges funding from the HKSAR government (LU340610, LU340412).

Keywords

  • Audit fees
  • Auditor choice
  • Board governance
  • Earnings quality
  • Family firms

Cite this

SRINIDHI, Bin N. ; HE, Shaohua ; FIRTH, Michael Arthur. / The effect of governance on specialist auditor choice and audit fees in U.S. family firms. In: The Accounting Review. 2014 ; Vol. 89, No. 6. pp. 2297-2329.
@article{8896f883fa1c472282e48e0c08f6e3f2,
title = "The effect of governance on specialist auditor choice and audit fees in U.S. family firms",
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 non-controlling 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.",
keywords = "Audit fees, Auditor choice, Board governance, Earnings quality, Family firms",
author = "SRINIDHI, {Bin N.} and Shaohua HE and FIRTH, {Michael Arthur}",
note = "Michael Firth acknowledges funding from the HKSAR government (LU340610, LU340412).",
year = "2014",
month = "11",
doi = "10.2308/accr-50840",
language = "English",
volume = "89",
pages = "2297--2329",
journal = "Accounting Review",
issn = "0001-4826",
publisher = "American Accounting Association",
number = "6",

}

The effect of governance on specialist auditor choice and audit fees in U.S. family firms. / SRINIDHI, Bin N.; HE, Shaohua; FIRTH, Michael Arthur.

In: The Accounting Review, Vol. 89, No. 6, 11.2014, p. 2297-2329.

Research output: Journal PublicationsJournal Article (refereed)

TY - JOUR

T1 - The effect of governance on specialist auditor choice and audit fees in U.S. family firms

AU - SRINIDHI, Bin N.

AU - HE, Shaohua

AU - FIRTH, Michael Arthur

N1 - Michael Firth acknowledges funding from the HKSAR government (LU340610, LU340412).

PY - 2014/11

Y1 - 2014/11

N2 - Family firms are characterized by less separation between ownership and control (Type 1 agency problem), but greater conflict of interest between controlling insiders and non-controlling 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.

AB - Family firms are characterized by less separation between ownership and control (Type 1 agency problem), but greater conflict of interest between controlling insiders and non-controlling 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.

KW - Audit fees

KW - Auditor choice

KW - Board governance

KW - Earnings quality

KW - Family firms

UR - http://commons.ln.edu.hk/sw_master/1627

UR - https://www.scopus.com/inward/record.uri?eid=2-s2.0-84928679637&doi=10.2308%2faccr-50840&partnerID=40&md5=c29e9a333001d127af6598c2b1f21dbd

U2 - 10.2308/accr-50840

DO - 10.2308/accr-50840

M3 - Journal Article (refereed)

VL - 89

SP - 2297

EP - 2329

JO - Accounting Review

JF - Accounting Review

SN - 0001-4826

IS - 6

ER -