With audit and auditors under intense scrutiny in numerous places it was only a matter of time before audit committee chairs saw their share of attention. And so they have.
When Svenja Hillebrandt and Nicole Ratzinger-Sakel looked at German company records between 2013 and 2017 they found by and large that audit quality fell and audit fees rose after the audit committee chairs changed.
“Our findings indicate that—beyond the AC (audit committee) chair’s characteristics—an AC chair change can also influence audit quality and audit pricing. Our findings show that changes of the AC chair are negatively associated with audit quality and positively associated with audit fees.”
The study comes as audit in Germany is under scrutiny following the Wirecard scandal which has prompted moves to reform the regulation of audit firms.
The UK too has seen audit in the spotlight with the recent publication of a white paper proposing extensive reform of audit regulation and the audit market, as well as greater scrutiny for audit committees.
But the new research throws a focus on what happens when audit committee leadership goes through routine change. One reason a change in the chair might produce a lower quality audit is that new chairs perhaps lack the “firm-specific” knowledge of predecessors. Audit fees might also rise because a new chair could “compensate” for this lack of insight by ordering auditors to undertake more work.
Accounting expertise
It’s worth noting some of the researchers’ other findings. On average, quality fell and fees rose following a change in the chair. But audit quality remains high if the outgoing chair had “accounting experience”.
Similarly, fees did not rise if the former chair was an accounting expert. Incoming chairs look as if they order more audit work if they are aware that their predecessors did not possess specific audit or accounting knowledge.
“This result highlights the importance of accounting expertise for AC chair’s monitoring effectiveness,” the writers conclude.
Audit has been highly controversial in the UK since the collapse of Carillion toward the end of 2017 and the closure of BHS, the department store chain, in 2016.
A white paper issued in March made an array of proposals including new sanctions for directors that fail in their financial reporting and audit committee duties. There are proposals for new standards for audit committee to implement covering their supervision of audits.
Audit committees face little research, which is surprising given how close their members are to the most important piece of work undertaken for investors: the audit. After this research, they may wish to reflect more on the importance of audit committee leadership.