Codetermination on the audit committee: An analysis of potential effects on audit quality

Abstract

This paper empirically investigates the association between codetermination on the audit committee (AC) and audit quality. Using a sample of 655 firm-year observations related to German CDAX companies, our results indicate that the presence of employee representatives on the AC is negatively associated with audit quality. This negative association can also be observed for the percentage of employee representatives serving on the AC. However, our analyses show that the mentioned findings turn insignificant when employee representatives have accounting expertise. In addition, the type of employee representatives seems to influence audit quality differently: our findings turn insignificant for employee representatives who are classified as company outsiders and, thus, expected to be more independent. These findings highlight the importance of accounting expertise and independence for AC members' monitoring effectiveness. To the best of our knowledge, this study is the first that analyses the impact of codetermination on the AC on audit quality.