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The Increased Role of the Audit Committee after SOX: Managing Relationships with the External Auditor
Udi Hoitash,
Rutgers University
Rani Hoitash, Bentley College
ABSTRACT. Recent reforms aimed at strengthening the audit committee make it responsible for the appointment, dismissal, and compensation of the independent auditor. These reforms also require that audit committees be comprised of independent board members and include one designated financial expert. In light of these changes we examine the association between audit committee characteristics and auditors’ compensation and dismissals in the post SOX period. We observe that stronger audit committees pay higher audit fees, are less likely to dismiss their auditor and contribute to auditor independence. Additionally, consistent with the objective of SOX, we find that the board of directors is no longer associated with decisions that pertain to the external auditor. Our results suggest that the increase in audit committee roles and independence after SOX and the reduction in board responsibilities with respect to the external auditor, contribute to auditor independence and audit quality.
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