SELF-SERVING BIAS, RESPONDENT KNOWLEDGE, AND PERCEPTIONS OF NON-AUDIT SERVICES’ IMPACT ON AUDITOR INDEPENDENCE

Abstract

A long-standing debate exists on whether external auditor independence is impaired when public accounting firms provide non-audit services to their audit clients. Much recent research has focused on auditor independence in fact, though standard-setters consider auditor independence appearance as equally important. This study examines the appearance (or perception) of auditor independence when such services are provided, empirically testing two prominent explanations – self-serving bias and respondent knowledge – given for why various stakeholders might disagree on the effects of nonaudit services on auditor independence. Using responses from three groups of professional accountants (financial statement preparers) and bank loan officers (financial statement users), we extend auditor independence perception research to the post-Enron time period, finding a significant number of respondents perceiving non-audit services to impair auditor independence. We also find strong support for the self-serving bias Research on Professional Responsibility and Ethics in Accounting, Volume 12, 173–202 Copyright r 2008 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1574-0765/doi:10.1016/S1574-0765(07)00208-7