The Influence of the CEO on Auditor Choice in Private Firms: An Interplay of Willingness and Ability

Abstract

Reliable financial reporting is highly important when aiming for sustainable development and the long-term financial stability of the entire economy. An external audit is one of the main monitoring mechanisms to warrant this reliability. While auditing serves as an independent monitoring mechanism towards management, studies indicate that management is often the driving force behind auditor appointments and terminations, especially if it is willing to drive auditor choice. While this raises questions about an auditor’s independence and resulting audit quality, willingness will only have an impact when management is also able to exert its will. This study, therefore, examines to what extent ability strengthens the CEO’s willingness to appoint a non-Big Four auditor. Using a dataset of 316 private firms, regression results show that when the CEO is willing to appoint a non-Big Four auditor and also has sufficient power, it is less likely that a Big Four auditor is actually appointed, at least when the control effectiveness of the board is weak such that the CEO can exert his/her power. This emphasizes the need for both shareholders and legislators to ensure that the independence of the auditor is guaranteed and to implement complementary monitoring mechanisms like a strong board.

Accountants and Sustainability Reporting

“…The importance of robust financial reporting should center on driving sustainable development and enduring financial reliability. An external audit plays a pivotal role as a monitoring mechanism to ensure such reliability (Corten et al, 2021).…”

Good Governance within Public Participation and National Audit for Reducing Corruption

“…These systems help to ensure transparency and accountability in the management of public resources, which is essential for promoting trust and confidence in government institutions. By providing independent verification and oversight of financial and operational processes, national auditing systems can help to prevent and detect fraud, corruption, and other forms of misconduct that can undermine the stability and integrity of social and economic systems [11][12][13][14]. Considering audit theory [15], motivation is an important dimension of audit performance.…”

“…Considering audit theory [15], motivation is an important dimension of audit performance. The results of the analysis of the audit theoretical framework show that the audit theory circle includes the concept of fiduciary responsibility [10], the concept of the separation of two rights [11], the principal agent concept [13,14], conflicts of interest [16], information [17][18][19], insurance [20,21], the shadow economy and institutional quality [22][23][24][25][26], behavior [27][28][29], supervision [30], and the concept of maintaining property rights and national governance [31][32][33]. Scholars [34][35][36][37] outline that with "people's direct participation and self-management" in the 18th Century, the national audit has been constantly improved in practice, actively exploring how to organically combine public participation with the national audit.…”

“…However, the results showed that scholars [7,[10][11][12][13][14][15]33] focus on the investigation of the internal control system, internal audit system, and contract system. At the same time, the accuracy of audits depends on considering external dimensions that affect national audit performance.…”

Transparency, Trust and Sustainability in Financial Information

“…The importance of robust financial reporting should center on driving sustainable development and enduring financial reliability. An external audit plays a pivotal role as a monitoring mechanism to ensure this reliability [16]. The information environment carries significant weight for investors, markets, and the broader community.…”