The effect of board structure on audit quality in private family firms: the moderating role of the CEO

Abstract

This study investigates the effect of board structure, measured by the presence of outside board members and CEO duality, on the demand for audit quality and investigates whether ownership structure moderates this relationship in the context of private family firms. Our results show that the presence of outsiders on the board increases the demand for audit quality. CEO duality only has a significant positive effect on audit quality in a subsample of large family firms. However, this positive effect of CEO duality is only present if the CEO does not have the power to avoid a high quality auditor, i.e. possesses a minority of the shares. Additionally, results suggest that the presence of outside board members only increases the probability of hiring a high quality auditor if the firm needs a higher quality auditor due to increased agency costs i.e. if the CEO has less than the majority of the shares. Moreover, board structure appears to have no effect on the demand for audit quality in the subsample of smaller family firms.