Auditor Independence During the 'Great Recession' of 2007-2009

Abstract

This study investigates whether auditors’ independence was compromised by client audit fee pressures during the recession of December 2007 through June 2009. We hypothesize that clients able to extract fee concessions from auditors during the recession, when audit risk increased, might also have been able to obtain more favorable audit opinions. We find that auditors are less likely to issue first-time going concern (GC) opinions to clients that exert fee pressure in 2008, but do not find this result in other years, including several years before and following the central recession year of 2008 (i.e. 2005-2007, 2009-2011). Our results suggest that the stringent economic environment of the recession may have weakened auditor independence for clients capable of exerting audit fee pressure, but this effect was restricted to 2008, the heart of the recession. We also find compensating payments (in the form of expected total fee increases or high current-year NAS fees) from fee pressure clients strengthen the negative association between fee pressure and auditors’ GC opinions.