A social network analysis of audit committees in Europe: impact on audit fees, audit opinion and earnings management

This doctoral thesis examines how the social networks of audit committee (AC) members in European firms influence the audit function. Rather than analysing ACs in isolation, the study recognises that directors simultaneously sit on multiple corporate bodies, creating complex networks that facilitate the exchange of information and the diffusion of governance practices. The central premise is that the position directors occupy within these networks – their “centrality” – affects the audit function, specifically audit fees, the audit opinion and earnings management. The study applies social network analysis (SNA) using four centrality measures: degree (number of direct connections), eigenvector (importance of connections), closeness (proximity to other actors in the network) and betweenness (acting as a bridge between otherwise disconnected parties). The thesis analyses 225 non-financial listed firms in eight European countries over the period 2005–2020, consisting of 6,899 directors and 2,668 audit committee members. The theoretical framework integrates three complementary economic theories. Resource dependence theory predicts that central directors obtain better information on audit standards and best practices, thereby strengthening oversight, although centrality may also diffuse questionable practices. Agency theory suggests that directors whose reputation is exposed across multiple firms exercise more rigorous monitoring, although dense networks may foster groupthink. Signalling theory indicates that external auditors interpret centrality as an indicator of quality, although such signals may be misleading. The empirical results reveal non-homogeneous effects across the variables studied. First, audit committee members’ centrality shows a positive and statistically significant association with audit fees, indicating that better-connected committees demand more extensive audits. Second, centrality significantly increases the likelihood of receiving unqualified audit opinions, in a manner consistent with auditors interpreting connectivity as evidence of strong governance. This effect is particularly pronounced in firms with lower leverage. Third, contrary to expectations, centrality shows no significant relationship with earnings management, suggesting that positive and negative effects counterbalance each other. The descriptive analysis shows that European AC networks, although fragmented, display a clear densification trend from 2005 to 2020. The proportion of connected firms increases from 36.9% in 2005 to 51.2% in 2013, indicating growing international connections despite the predominance of national networks. The study makes a theoretical contribution by demonstrating that AC effectiveness depends not only on observable attributes but also on intangible resources derived from relational positions. Methodologically, it applies multidimensional measures of centrality to the AC context, thereby overcoming limitations of prior research. The findings suggest that regulators, firms and auditors should take directors’ network positions into account when assessing governance quality. The thesis acknowledges important limitations, such as the need for more recent data and the value of examining informal networks, among others. Nonetheless, the evidence shows that corporate social networks are a previously unexplored, yet essential, component of AC functioning and its impact on audit-related functions in an increasingly interconnected European setting.