Abstract
This study investigates if Audit Committee (AC) effectiveness, measured by size, activity, independence, and expertise, affects audit quality through the appointment of a high quality auditor. This study deepens our understanding of the role of AC in a developing country that recently applied a Corporate Governance (CG) Code, Saudi Arabia. The study employs logistic multiple regression analysis, in which we use two dummy dependent variables: selection of an industry specialist auditor and a Big-4 auditor or not. We examine a sample of 361 firm-year observations from 2007 to 2011. The basic analysis shows that AC size is the only determinant of audit quality, with a negative coefficient. When aggregating the effectiveness characteristics in one score, we find a significant negative correlation with audit quality, which implies that effective ACs are less likely to select an industry specialist auditor, contrary to expectations. The additional analysis shows that none of the AC effectiveness characteristics affects the decision of the AC to appoint a Big-4 auditor, whether individually or collectively. Furthermore, we find that ACs of firms with higher family and managerial ownerships and larger firm size are more likely to select a higher quality auditor. CG regulators and interested parties should recognize that AC effectiveness does not necessarily ensure audit quality or rational decisions, since we find that effective ACs are more likely to select an industry non-specialist auditor. ACs seem to comply with CG regulations in form rather than in substance.