The objective of this study is to examine managerial involvement in auditor selection decisions when audit committees are “directly responsible” for auditor relationships, including selection of the audit firm. The Sarbanes‐Oxley Act (SOX) of (2002) requires fully independent audit committees to be “directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm” (Section 301). This statutory requirement is a regulatory attempt to eliminate management influence over the external auditor and align auditor incentives with those of the board and shareholders.1 While regulators largely assume that audit committees take responsibility for auditor selection in the post‐SOX period (Doty 2011), there exists no archival analysis testing this assumption. Therefore, the effectiveness of this regulation (SOX Section 301) remains uncertain. In this paper, we examine (a) whether contrary to the intent of SOX, managers continue to influence auditor selection decisions in the post‐SOX period, and (b) whether this influence subsequently impairs auditor independence as presumed in the legislation.

This study explains the challenges associated with the Heckman (1979) procedure to control for selection bias, assesses the quality of its application in accounting research, and offers guidance for better implementation of selection models. A survey of 75 recent accounting articles in leading journals reveals that many researchers implement the technique in a mechanical way with relatively little appreciation of important econometric issues and problems surrounding its use. Using empirical examples motivated by prior research, we illustrate that selection models are fragile and can yield quite literally any possible outcome in response to fairly minor changes in model specification. We conclude with guidance on how researchers can better implement selection models that will provide more convincing evidence on potential selection bias, including the need to justify model specifications and careful sensitivity analyses with respect to robustness and multicollinearity. Data Availability: Data used are available from public sources identified in the study.

Regulators have expressed concerns about the “revolving door” between auditors and clients, whereby audit employees move directly from audit firms to audit clients (i.e., “direct alumni hires”). Regulators are concerned that these direct hires could compromise audit quality, partly because these employees could have previously audited their hiring company's financial statements. In contrast, we examine accounting and finance executives who move indirectly from audit firms to audit clients and who could not have previously audited the hiring company's financial statements (i.e., “indirect alumni hires”). We show that indirect hires occur more often than the direct hires that have concerned regulators. We predict and find that both direct and indirect alumni hires are associated with lower rates of executive turnover and audit firm turnover. However, there is no evidence that the reduced rates of executive turnover are explained by managerial entrenchment or that these hires are associated with lower audit quality. Overall, our findings suggest that direct and indirect employee movements from audit firms to audit clients are beneficial to executives, audit clients, and audit firms because they reduce the incidence of costly turnover.