Motivated by the importance of effective oversight in mitigating the risks of employee external whistleblowing, this study investigates the effect of audit committee financial expertise and equity compensation on employee external whistleblowing. Drawing on theories of motivated reasoning and overconfidence, I propose that while audit committee financial expertise could enhance oversight, higher equity compensation can trigger cognitive biases that lead audit committee members to overestimate their monitoring effectiveness and discount or overlook the risks in internal reports of wrongdoing, increasing employee external whistleblowing. Using a sample of U.S. listed firms involved in misconduct, I find that greater audit committee financial expertise is associated with lower levels of employee external whistleblowing when audit committee equity compensation is low, but with higher levels of employee external whistleblowing when equity compensation is high. These findings suggest that audit committee equity compensation may undermine the benefits of financial expertise, offering new insights into the unintended consequences of governance and compensation practices.

We examine the effects of independent directors' external social connectedness on corporate fraud commission and detection. The results show that well-connected independent directors do not affect the likelihood of fraud commission but significantly reduce the likelihood of fraud detection given occurrence of a fraud. In particular, with a one-standard-deviation increase in independent directors' connectedness, the likelihood of fraud detection reduces by 22.5%. We also find that the consequences of fraud commission faced by firms with well-connected independent directors are less severe as fraud remains undetected for a longer period of time and fewer people are charged with fraud when independent directors are well connected. We further show that independent directors' connections to fraud firms significantly increase a firm's propensity to fraud commission and the likelihood of fraud detection is also higher. Overall, our results suggest that directors' personal networks have a “dark side”. Regulators should be aware of unintended consequences associated with directors' external social connections when considering how to prevent and detect corporate fraud.

This study investigates how audit firm-level spatial licensing requirements affect audit market competition and audit quality, focusing on small (triennially inspected) audit firms, for which licensing frictions are most relevant. Exploiting the staggered state-level adoption of CPA firm mobility provisions that remove spatial licensing barriers, we find that adoption increases competition among small audit firms, as reflected by lower market concentration and greater first-time entry by small out-of-state auditors. Firm mobility adoption also improves audit quality, as indicated by a lower likelihood of client misstatements. These effects are concentrated in less competitive audit markets and among auditors with higher PCAOB deficiency rates. Audit quality improvements extend to both incumbent auditors and new out-of-state entrants, and we find no evidence of audit fee discounting. Overall, our results suggest that removing spatial licensing barriers fosters a more competitive small audit firm market while improving audit outcomes, without increasing audit costs.

We investigate whether audit fees and auditors' opinions on internal controls are associated with whistleblowing allegations externally filed to regulatory agencies. We find that firms subject to whistleblowing allegations have significantly higher audit fees, regardless of the substance of these allegations, whereas an auditor is more likely to issue an adverse opinion on internal controls when the allegation is substantiated, rather than frivolous. Further, our findings suggest that auditors are involved in the auditing of whistleblowing when the allegation is still in an internal stage. We also show that firms subject to external whistleblowing allegations have a lower likelihood of restating financial statements prepared in the allegation year when greater audit effort is made in that year. Our study is among the first to demonstrate the role of auditors in the context of whistleblowing.

This study examines whether the audit quality of Big 4 audit firms is affected by an audit office's proximity to more target universities for appointing staff auditors. We identify these target universities using a recruitment map of a Big 4 audit firm and unique office-level hiring data hand-collected from LinkedIn. Our findings suggest that audit offices closer to more of their key feeder schools and universities with accredited business schools are associated with higher audit quality, as observed by a lower likelihood of financial accounting misstatements. Our results are robust across alternative measures of labor market proximity and audit quality, and to a battery of sensitivity tests, including controlling for client firms' proximity to universities. Overall, our results suggest that audit offices benefit from being proximate to more key suppliers of staff auditors.