The effect of governance on specialist auditor choice and audit fees in U.S. family firms
Document Type
Journal article
Source Publication
The Accounting Review
Publication Date
11-1-2014
Volume
89
Issue
6
First Page
2297
Last Page
2329
Publisher
American Accounting Association
Keywords
family firms; board governance; earnings quality; auditor choice; audit fees
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.
DOI
10.2308/accr-50840
Print ISSN
00014826
E-ISSN
15587967
Publisher Statement
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Srinidhi, B. N., He, S., & Firth, M. (2014). The effect of governance on specialist auditor choice and audit fees in U.S. family firms. The Accounting Review, 89(6), 2297-2329. doi: 10.2308/accr-50840