Auditor's expertise and the effect of the European banking sector CEO skill on audit quality during the European financial crisis

The paper examines whether Eurozone banks that replace their CEOs with highly skilled ones, also switch to industry-expert auditors, thereby increasing the quality of auditing they receive. Using a sample of Eurozone banks, we develop a logistic regression model that incorporates auditor expertise as an audit quality determinant, audit opinion and directorship skill. Moreover, various proxies are used to control for the effect on the type of auditor opinion. The findings indicate that Eurozone banks alter their approach regarding auditor choice, after replacing their CEO with one with a higher level of directorship skill. Moreover, they seem to switch towards auditors specialising in the sector, thus increasing the quality of auditing, but only if they operate in a country facing fiscal sustainability issues. Robustness checks of the results are assertive of the validity of the conclusions reached. There are important implications arising from the study, highlighting that greater managerial performance is not necessarily reflective of financial health and stability. In fact, banks operating in a harsh financial environment may seek additional reassurance by establishing a higher quality of audit.