Mechanisms for appointing and enhancing the independence of the auditor

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Abstract

Hiring an independent auditor is a fundamental goal that companies pursue to ensure the integrity of financial reporting. In developing countries, the literature focuses on examining factors influencing auditor change (Saaydah, 2021), with little interest in understanding the mechanism of external auditor selection (EAS) by audit committee members (ACMs). This study extends the literature by providing an experimental investigation of the main and interactive weights of factors influencing ACMs’ decisions regarding EAS. Using a mixed approach, the study found that prior knowledge of the audit firm had the greatest impact on ACMs’ decisions, in addition to revealing some interactions between the variables. The study provides valuable insights into how the EAS process can be revitalized, prioritized and institutionalized. It also gives auditors a better picture of how to craft a request-for-proposal to enhance their competitiveness. The insights gained also provide 1) a better understanding of the factors that drive EAS and how they interact in shaping the judgments of ACMs; 2) highlighting the importance of transparency in EAS by disclosing the selection mechanism in the annual report; 3) providing a set of recommendations on how to enhance the independence of the audit committee when deciding to nominate auditors.

Keywords: External Auditors Selection, Audit Committee Decision, Corporate Governance, Mixed Method

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: M40, M42, M48

Received: 08.09.2023
Accepted: 29.01.2024
Published online: 01.02.2024

How to cite this paper: Shbeilat, M. K. (2024). Mechanisms for appointing and enhancing the independence of the auditor. Corporate & Business Strategy Review, 5(1), 175–191. https://doi.org/10.22495/cbsrv5i1art17