Agency conflicts and choice of specialist audit firms and audit partners: Signaling or substantial monitoring?

Abstract

This study contributes to the literature on company audits by examine the demand-side effects of the selection of industry-specialist audit firms and auditors; it does this by considering the impact of the agency problem that exists between controlling owners and minority shareholders. It is shown that the potential magnitude of the agency costs associated with interest entrenchment increases the demand for auditors whose audit quality is perceived to be higher with regard to the signaling role of audits, but decreases the probability of engaging individual specialist auditors who actually carry out higher quality audits with regard to substantial monitoring.