The Board Of Directors' Accounting Firm Experience And Auditor Selection

Governance regulators currently place more emphasis on ensuring the presence of professional background on board of directors.Underlying this is a belief that greater expertise enhances the effectiveness of board of directors.Given that professional staff with audit firm experience have been the main source of directors with audit expertise,and it is widely-spread in capital market that auditors move from accounting firms to corporate boards or become top managers in new companies,it is of great theoretical and practical value to study the role of directors with audit firm experience in corporate governance.This study investigates the impact of directors' accounting firm experience on auditor choice decision made by over 10,000 Chinese A-share listed companies during the period from 2010 to 2016.Our analysis finds that board of directors possessing greater levels of audit expertise members are associated with smaller-size external auditors.When we segregate the type of directors between independent directors and non-independent directors,we find that the negative impact identified is mainly driven by independent directors.Furthermore,when we separate different market types and between SOEs and Non-SOEs,we find the impact of audit experience is confined to SME board and non-state-owned companies.To elaborate the research,we further focus the directors' audit expertise itself which is measured by 3 dimensions:whether they were employed by large audit firms,the highest position they reach,and the number of audit firms they have served.The results indicate that the more experienced the directors,the higher professional competence they have,the more likely the company is to select smaller-size external auditors,which strongly support the resource dependence theory our hypothesis based on.The research findings are important because they highlight the usefulness of directors' role as resource providers,and recognize the unique function the directors may contribute to corporate governance,which regulators and scholars currently rarely pay attention.Therefore,this paper not only enriches the related literature for individual characteristics of directors and auditor selection,but also provide new perspectives and some reference for concerned regulators and companies considering appointing directors with audit expertise.