Auditor Independence and Auditor Bargaining Power: Some Spanish Evidence Concerning Audit Error in the Going Concern Decision

Abstract

It is well known that where an auditor's relative bargaining power is high, this may help its independence and prevent a Type II error (no qualification but corporate failure). It is less well known that this may also lead to a lack of independence in the form of over‐conservatism and an unjustified inclination by an auditor to qualify to protect its reputation leading to a Type I error (a qualification but no corporate failure). We therefore hypothesize that there is a positive relationship between the auditor's relative bargaining power and Type I errors (‘H1’) and a negative relationship between it and Type II errors (‘H2’). The empirical study supports H1 but rejects H2. Taken together, these results suggest that Spanish auditors have a high propensity to qualify to protect their reputation, undeterred by pressure from client companies, in order to protect their reputation – ‘over‐conservatism’ as we have called it.