Audit Committee-Auditor Interlocking, Auditor Turnover and Audit Quality

I examine the likelihood of auditor dismissal following financial statement restatements at companies where at least one of the audit committee members works on the audit committee of another company that is audited by the same audit firm (“AC-auditor interlocking”). Empirical evidence shows that companies with AC-auditor interlocking relationships are less likely to dismiss their auditors after a restatement occurs. Further evidence suggests that interlocking companies that retain their auditors after a restatement have lower subsequent audit quality compared to interlocking companies that dismiss their auditors. These findings raise concerns about the audit committee’s role in auditor termination when audit quality is relatively low and suggest that AC-auditor interlocking may impair audit quality.