Audit Committee Independence and Auditor Reporting for Financially Distressed Companies: Evidence From an Emerging Economy

Abstract

This study examines the relationship between audit committee independence (by using stockholding as a measure to assess substantive independence) and auditor reporting for financially distressed companies. Based on hand-collected data for 86 financially distressed companies listed on Pakistan Stock Exchange (PSX) for the period 2011 to 2019, our logistic regression results show that the greater the percentage of audit committee stockholding, the less likely the auditor is to issue going concern report. Further, this relationship is exacerbated by CEO influence. The results are robust to alternative estimation techniques, different measures of audit committee independence and CEO influence, and endogeneity issue. These results suggest that alongside procedural independence, it is important to focus on substantive independence of audit committees by using stockholding as an independence measure and assessing its impacts on auditor reporting. This study has important implications for shareholders and investors.