Audit committee members must be independent of management to protect shareholder interests. While current regulations restrict audit committee members from holding management positions (i.e., affiliations), studies find that management’s preferences continue to impact audit committee decisions. This motivates analysis of independence threats beyond affiliations. We apply the American Institute of Certified Public Accountants’ conceptual approach to independence and examine the threat of management’s undue influence over audit committee members. Examining the relative tenure of executives and audit committee members, we find that greater management influence is associated with a lower propensity of the auditor to issue a modified going concern opinion to a distressed client. We also find that greater management influence is associated with increased opinion shopping behavior. These findings are consistent with an undue influence threat to audit committee independence. Our results extend the academic literature and inform regulatory concerns on audit committee independence.
SUMMARY Auditing theory predicts that larger auditors will be more likely to issue a going concern opinion to a distressed client. However, the existing empirical evidence on this issue is mixed. We attribute these mixed results to a failure to adequately control for clients' financial health. We demonstrate how properly controlling for clients' financial health reveals a positive relationship between auditor size and the propensity to issue a going concern opinion. We corroborate our findings by replicating a related study and showing how the results change when financial health variables are added to the model. In supplemental analysis, we find that Big 4 auditors are more likely than mid-tier auditors (Grant Thornton and BDO Seidman) to issue going concern opinions to distressed clients. We also find that, compared to other auditors, the Big 4 are less likely to issue false-positive (Type I error) going concern opinions. We find no evidence that the Big 4 are more or less likely to fail to issue a going concern opinion to a client that eventually files for bankruptcy (Type II error). Our results are robust to the use of a variety of matching techniques. JEL Classifications: M41; M42.