Phillip T. Lamoreaux

Management Influence on Auditor Selection and Subsequent Impairments of Auditor Independence During the Post-SOX Period

This study investigates the influence of management over auditor selection decisions during a period in which audit committees have “direct responsibility” for auditor selection. We find that contrary to the intent of SOX, management continues to have significant influence over auditor selection and this is not mitigated by the presence of an apparently higher quality audit committee. As SOX presumes that management influence over auditor selection leads to negative outcomes, we also examine the impact that management influence has on proxies for subsequent auditor independence during the post-SOX period. We find that companies whose managers influence auditor selection are significantly less likely to receive going concern opinions, but no evidence of an impact on earnings management. We also find mixed evidence as to whether the relationship between management influence over auditor selection and subsequent audit quality is influenced by audit committee quality.

Lead Independent Directors: Good Governance or Window Dressing?

We document the emergence of the lead independent director (LID) board role in a sample of U.S. firms in 1999-2015. We find that firms that adopt a LID board role are larger and have more independent boards, higher institutional investor holdings, and an NYSE listing. Firms with greater anticipated benefits from monitoring also adopt a LID role, e.g., firms with dual CEO-Chairman, with more takeover defense mechanisms, and with higher cash holdings. Using an event study methodology, we find that investors respond positively to the adoption of a LID board role. Lastly, using instrumental variables to address endogeneity in the LID board role, we find that firms with a LID are more likely to terminate poorly performing CEOs. Taken as a whole, these results suggest that the LID board role enhances firm value and improves the quality of corporate governance.

Employee Movements from Audit Firms to Audit Clients

Regulators have expressed concerns about the “revolving door�? between auditors and clients, whereby audit employees move directly from audit firms to audit clients (i.e., “direct alumni hires�?). Regulators are concerned that these direct hires could compromise audit quality, partly because these employees could have previously audited their hiring company’s financial statements. We expand the scope of the analysis by examining employees who move indirectly from audit firms to audit clients and who could not have previously audited the hiring company’s financial statements (i.e., “indirect alumni hires�?). We show that indirect hires occur more often than the direct hires that have concerned regulators. We predict and find that both direct and indirect alumni hires are associated with lower rates of executive turnover. There is no evidence that the reduced rates of executive turnover are explained by managerial entrenchment. We also predict and find that both direct and indirect alumni hires are associated with lower rates of audit firm turnover. However, there is little evidence that these hires result in lower audit quality. Overall, our findings suggest that direct and indirect employee movements from audit firms to audit clients are beneficial to executives, audit clients, and audit firms as they reduce the incidence of costly turnover.