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In Panel A of Table 2.5 in the Appendix, Models MBO 1 to MBO 4 report the results of the OLS regressions on audit committee characteristics for MBOs. This study does not include all the audit committee variables in the same regressions, in order to avoid high correlation between them.

The percentage of non-executive directors on an audit committee

The percentage of non-executive directors on an audit committee

(Ned%AudCom) has no significant relationship with AEM (AccruKo). The sign

direction of AEM is significantly negative in univariate tests, which indicates negative AEM. This suggests that the percentage of non-executive directors on an audit committee has no impact on AEM, which is inconsistent with hypothesis H1-2a.

Non-executive directors might perform little or no real monitoring role as they lack the independence, time, expertise and information they would need in order to challenge management activities effectively (Patton and Baker, 1987; Gilson and Kraakman, 1991). Hence a high percentage of non-executive directors on the audit committee might have no impact on AEM.

Financial expertise on audit committee

The financial expertise of audit committees (FinancialExp) has no significant relationship with AEM. The sign direction of AEM is significantly negative in univariate tests, which indicates negative AEM. This suggests that the financial expertise of audit committees has no impact on AEM, which is inconsistent with hypothesis H1-2b.

Equity ownership by members of audit committees

relationship with AEM. The sign direction of AEM is significantly negative in univariate tests, which indicates negative AEM. This suggests that equity ownership by audit committee members has no impact on AEM, which is inconsistent with hypothesis H1-2c.

Moreover, as an alternative measure of equity ownership, the presence in an audit committee of an outside blockholder with more than a 3% shareholding

(3%holdAudCom) has no significant relationship with AEM. The sign direction of

AEM is significantly negative in univariate tests, which indicates negative AEM. This suggests that having a blockholder with a 3% shareholding on the audit committee has no impact on AEM, which is inconsistent with hypothesis H1-2e.

Audit committee size

Audit committee size (AudComSz and AuditSz2BoardSz) has on significant relationship with AEM. The sign direction of AEM is significantly negative in univariate tests, indicating negative AEM. This suggests that audit committee size has no impact on AEM, which is inconsistent with hypothesis H1-2g.

Audit committees might not take sufficient care that an MBO is about to happen, and thus they might focus on mitigating traditional positive AEM, in which managers boost earnings, rather than noticing negative AEM. Hence, audit committee members are unable to spot negative AEM behaviours prior to MBOs.

In Panel B of Table 2.5 in the Appendix, Models MBO 1 to MBO 3 report the results of the OLS regressions on audit quality for MBOs.

Big 5 auditors

The presence of a Big 5 auditor (Big5) has an insignificant relationship with AEM. The sign direction of AEM is significantly negative in univariate tests,

which indicates negative AEM. This suggests that the presence of a Big 5 auditor has no impact on AEM, which is inconsistent with hypothesis H1-3a.

External auditors might have no awareness that an MBO is about to happen, and thus they might focus on limiting traditional positive AEM, in order to mitigate managers’ attempts to boost earnings, rather than on spotting negative AEM.

Audit fees

Audit fees (AudFees/AssetsSqrt) have a significant negative relationship with AEM. The sign direction of AEM is significantly negative in univariate tests, which indicates negative AEM. This suggests that higher audit fees are associated with more AEM, which is inconsistent with hypothesis H1-3b.

Economic rents associated with audit fees create an economic bond between auditors and their clients, which may affect auditors’ independence and lead them to permit AEM (Frankel et al., 2002). In addition, higher levels of AEM are likely to be associated with higher inherent risks, as assessed by auditors. The higher the level of inherent risk, the more audit effort will be required to reduce the risk of detection in order to achieve a given level of audit risk (Gul et al., 2003). Hence higher audit fees might be associated with higher levels of AEM.

Non-audit fees

Non-audit fees (LNNonAudFees, NonAudFees/AssetsSqrt and

NonAudFees/TotalFees) have a significant positive relationship with AEM. The

sign direction of AEM is significantly negative in univariate tests, indicating negative AEM. This suggests that higher non-audit fees are associated with less AEM, which is inconsistent with hypothesis H1-3c.

about a client's business, which may improve the quality of all their services (Wallman, 1996). Hence higher non-audit fees might lead to less AEM.

Summary of findings for management buyouts

In summary, audit committee characteristics have no impact on AEM, which is inconsistent with hypotheses H1-2a, H1-2b, H1-2c, H1-2e and H1-2g. With regards to

the quality of external audits, the presence of a Big 5 auditor has no impact on AEM, which is inconsistent with hypothesis H1-3a. Higher audit fees are

associated with more AEM, which is inconsistent with hypothesis H1-3b. Higher

non-audit fees are associated with less AEM, which is inconsistent with hypothesis H1-3c.