The Pre-Departure Revolving Door Phenomenon: Investors' Independence Perceptions

Abstract

This study examines nonprofessional investors’ perceptions of auditor independence when an accounting firm audits a client who has offered a job to a member of the audit team. The study also compares whether the perceived independence of both public and non-public company accounting firms improve as the strength of the revolving door safeguards increase. Empirical research has not proven whether Section 206 of the Sarbanes-Oxley Act improves perceptions of auditor objectivity when issues of auditor employment with the client appear prior to the auditor leaving the firm. Ninety-six nonprofessional investors from a University in the United States respond to an experiment to answer the hypotheses in this study. While the revolving door phenomenon impairs perceptions of public and non-public accounting firms’ independence, public company auditors’ independence is perceived to be more impaired by this threat to independence. The results also indicate that even though perceptions of both firms’ objectivity improve as the strength of the independence safeguards increase, public company auditor are perceived as being more objective than non-public company auditors. This study has implications for accounting regulators and academics. Accounting regulators may first consider how to improve perceptions of firms that audit non-public companies in order to fully realize the benefits of increasing the strength of the standards. Regarding the academic literature, this study is the first post-Sarbanes-Oxley study to empirically establish that the pre-revolving door phenomenon impairs objectivity. This is also the first study to investigate nonprofessional investors’ perceptions of the issue, despite their prominence in the capital markets.