The Effect of Audit Committee and Board of Director Independence on Auditor Resignation

This study examines the relationship between audit committee and board independence and auditor resignations. Independent audit committee and board members, who are concerned about incurring legal liability and harming their reputations, support the external auditors in accomplishing their assurance duties. We use a logit model to compare audit committee and board independence between two types of auditor switches: 190 auditor-initiated switches versus 190 matched client-initiated switches during the time period 1996 to 2000. Our results show that audit committee and board of director independence are both negatively associated with the likelihood of an auditor resignation. Our results also show that audit committee independence is positively related to the quality of the firm's successor auditor. This suggests that independent audit committees also play a mitigating role in reducing the negative consequences associated with an auditor resignation.