Author(s): Bomi Song
This study examines whether the expertise of audit committees (ACs) affects the relationship between audit market concentration and audit quality by focusing on the composition of AC financial expertise. Regulatory agencies in each country show great interest in the situation where the audit market is concentrated on a small number of auditors. This is because the concentration of the audit market can affect audit quality. Prior research has reported that the higher the concentration of the audit market measured by the Herfindahl index, the lower the audit quality. However, if ACs with expertise perform their original monitoring function properly, it is expected that the deterioration of audit quality will be restrained by reducing the tendency of oligopolistic auditors to neglect audit work although audit market concentration increases. The empirical results show that as the concentration of the audit market increases, the audit quality deteriorates and that this negative relation between audit market concentration and audit quality decreases only when ACs have certified accountants, other accounting experts such as chief financial officers and controllers, or finance experts (excluding finance professors). In addition, this study finds that ACs with accounting experts only or all the three types of financial experts decrease the negative relation between audit market concentration and audit quality. These results indicate that the impacts of AC expertise on the relationship between audit market concentration and audit quality depend on the composition of AC financial experts. Thus, this paper fills the gap in the literature by highlighting the importance of AC financial expertise for the influence of audit market concentration on audit quality and by providing a more comprehensive view of ACs’ effectiveness.