Political connections and audit committee characteristics on audit quality

Abstract

The objective of this study is to analyze the influence of political connections and audit committee characteristics on audit quality, measured by the fees paid to auditors. Although the international literature explores political connections and auditing, there is a lack of studies addressing the role of the audit committee as a governance mechanism in the Brazilian context, especially considering its non-mandatory nature for all companies. Research is lacking on how the composition and functioning of these committees, in politically influenced environments, affect financial oversight and risk mitigation. This discussion is relevant due to the limited evidence on the impact of political connections on auditor independence and financial transparency in Brazil. Understanding these effects is essential to improve governance practices and reduce the use of political connections as assets for obtaining government benefits. The findings indicate that larger, independent, and active committees strengthen oversight, reduce fraud, and increase transparency. The results provide support for companies and policymakers seeking more robust governance. Descriptive and documentary study, using an unbalanced panel of 153 Brazilian companies listed on B3 S.A. – Brasil, Bolsa, Balcão, between 2016 and 2023. The study indicates that political connections within the audit committee reduce audit quality in Brazil, contrasting with part of the international literature. On the other hand, larger, more independent committees with frequent meetings increase audit quality and strengthen governance. Female participation and the financial expertise of committee members are associated with lower audit fees. The results highlight the importance of an adequate and efficient composition of audit committees.