Ownership structure and auditor selection

Abstract

Purpose

This paper aims to investigate the effect that ownership structure (public vs private) has on the demand for high-quality auditors, specifically in the US banking industry.

Design/methodology/approach

The authors predict that public banks are more likely to hire a high-quality auditor than private banks and pay a higher audit fee premium for that high-quality auditor (due to higher agency costs, more demand for financial information and higher litigation risk). The authors analyze 2008–2014 banking data from the Federal Reserve using probit and OLS regression analysis to examine if there is a higher probability that public banks choose higher quality auditors and pay higher audit fees when they do so.

Findings

The results show that private banks are less likely to hire Big 4 auditors and industry-expert auditors than public banks. The authors also find that both private and public banks pay higher audit fees for Big 4 and industry-expert auditors, and that public banks pay a higher premium for Big 4 auditors and industry experts than private banks.

Research limitations/implications

The findings may not be fully generalizable to other types of firms, as banking is a heavily regulated and complex industry. However, inferences from this study may be generalizable to other similar industries such as insurance or health care.

Practical implications

The results of this paper imply that public and private banks have differing priorities when hiring their financial statement auditor. This may be of interest to investors and auditing regulators.

Social implications

The findings of this paper underscore the value of hiring an industry-expert auditor in an industry that is highly complex and regulated. This may be of interest to managers and policymakers.

Originality/value

Due to data restrictions, the emphasis of prior literature on the banking industry has been on public banks. This study is the first to analyze the differences between public and private banks’ demand for audit services.

Citation

Hall, C.M., Hoffman, B.W. and Liu, Z. (2020), "Ownership structure and auditor selection", Managerial Auditing Journal, Vol. 35 No. 8, pp. 1121-1142. https://doi.org/10.1108/MAJ-07-2019-2360