Perceptions Of Auditor Independence Research Articles

Audit firm tenure disclosure and nonprofessional investors' perceptions of auditor independence: The mitigating effect of partner rotation disclosure

AbstractIn 2017, the PCAOB began requiring audit firm tenure disclosure within the audit report for SEC registrant clients. Many commenters raised the concern that prominent disclosure of firm tenure would lead investors to inappropriately infer a negative relation between audit quality and long tenure. This is particularly troubling given that empirical evidence generally does not support this concern. In our first experiment, we predict and find that disclosing an audit firm's long tenure within the audit report increases investors' perceptions that the audit firm's independence was impaired while conducting the audit. However, we also identify an intervention that mitigates the effects of disclosing long tenure—an accompanying disclosure in the audit report of the firm's adherence to the SEC's mandatory partner rotation requirement. We find that such a disclosure moderates the effect of long tenure disclosure such that in the absence (presence) of a partner rotation disclosure, investors do (do not) perceive increased independence impairment when long firm tenure is disclosed. In a second experiment, we predict and find that long firm tenure disclosure reduces investors' preference to invest in an otherwise quantitatively optimal investment and that this relation is driven, in part, by perceptions of independence impairment. Again, this result is attenuated by partner rotation disclosure. Our results should be useful to regulators in understanding the effects of their disclosure mandate and to audit firms in understanding a practical way in which they might mitigate the implications of such effects.

Governing anti-corruption and perceived auditor independence

PurposeThe growing international legal agenda and the fast development of corporate governance rules are now prompting firms to put emphasis on anti-corruption procedures. On the other hand, wide-ranging concerns have been raised by regulators and policymakers regarding the effectiveness of audit committees in promoting ethical behavior and safeguarding auditor independence from the adverse consequences of purchasing non-audit services. The purpose of this paper is to examine the relationship between the adoption of anti-corruption measures and perceived auditor independence in the context of audit committees.Design/methodology/approachAfter conducting the Breusch–Pagan Lagrange Multiplier test and the Hausman test, the random-effect model is used as the most appropriate estimator. Several endogeneity tests are also used to account for the endogenous nature of the corporate governance variables in the models.FindingsUsing a sample of UK FTSE 350 firms, this paper provides evidence that anti-corruption efforts are associated with lower purchases of non-audit services and lower economic bonding between auditors and their clients. Furthermore, the findings of this paper reveal that the adoption of anti-corruption efforts substitutes the role of audit committees in enhancing perceived auditor independence and that audit committees do not play a significant incremental role.Originality/valueTo the best of the author’s knowledge, this is the first study of its kind to focus on bolstering perceived auditor independence while enhancing the control and ethical environment from the clients’ side instead of the auditors’ side.

Auditor Independence: Evidence on Non-audit fees, firm financial health and investors’ perceptions of earnings

Motivated by the mixed results of prior research regarding the role of non-audit fees (NAFs) on auditor independence, this study examines the effect of NAFs on earnings response coefficients (ERCs) of healthy and financially distressed firms. We find that NAFs positively affect ERCs for healthy and marginal firms with little incentives to manage earnings while NAFs negatively affect ERCs for financially distressed firms with more incentives to manage earnings. We confirm our findings by showing that distressed firms are more likely to use accrual-based earnings management (AEM) as a channel to affect ERCs. These results hold after we control for various other determinants of audit quality and possible endogeneity. Results provide policy, research, and practical implications by advancing our understanding of the relationship between NAFs and investors’ perceptions of auditor independence.

An investigation of the credibility of and confidence in audit value: evidence from a developing country

PurposeThis study aims to investigate the factors that enhance the credibility of and confidence in audit value.Design/methodology/approachData were collected from 254 institutional investors through a questionnaire survey and were analyzed using partial least squares structural equation modelling (PLS-SEM).FindingsThe findings reveal that the two influential predictors of enhanced credibility and confidence are perceived auditor independence and improved auditor communication. Factors related to auditor–client affiliation, such as restrictions on providing non-audit services, mandatory auditor rotation and the presence of effective audit committees, are identified as creating the perceived independence. Improved auditor communication is linked with improving the audit report and ensuring audit education, thus creating more sophisticated users who better understand the scope and purpose of an audit. Furthermore, independent audit oversight acts as a moderator in the relationship between perceived auditor independence, improved auditor communication and enhanced credibility. Enhanced credibility can lead to greater confidence in audit value.Originality/valueIn the wake of the global financial crisis and loss of confidence in the role of auditors, this study investigates the factors that can enhance the credibility of and confidence in audit value, especially in a non-Anglo-American setting. This study is unique in terms of methodological development, as it uses a higher-order Type II reflective–formative model using PLS-SEM.

The effect of disclosing audit quality control deficiencies on non-audit tax services: Evidence from Deloitte’s 2007 PCAOB Part II inspection report

We examine whether public disclosure of Deloitte 2007 PCAOB Part II report, which identifies quality control deficiencies related to audits of income tax accounts, affects Deloitte’s auditor-provided tax services (APTS). Using a difference-in-differences model, we document a 17 percent lower likelihood of Deloitte’s audit clients employing APTS relative to clients of other annually inspected firms when the report is made public. We also find that the dampening effect of publicly disclosing the Part II report on Deloitte’s APTS is more evident among audit clients paying higher non-audit fees to auditors and those with more complex tax planning. These results suggest that revealing income tax-specific quality control deficiencies prompts audit clients to revise upward (downward) their expected costs (benefits) of perceived auditor independence impairment (knowledge spillover) stemming from APTS. Overall, our study suggests that public disclosure of audit firm-wide quality control deficiencies pertaining to audits of income tax accounts imposes a collateral damage to the inspected firm’s non-audit tax services, thereby providing a more complete understanding of the consequences of the PCAOB’s communications about quality control deficiencies in Part II reports.

Perceived independence or knowledge spillovers: the demand for non-audit services among family businesses

This study investigates the impact of family involvement in top management teams, family firms' life cycle stages, and family firm identification on family firms' demand for non-audit services (NAS). Based on a hand-collected panel dataset including 1,148 German firm-year observations made by 162 family firms, we show that family involvement in top management teams is negatively related to the demand for NAS, resulting in less financial bonding with the incumbent auditor. Moreover, later life cycle stage and high family firm identification positively drive the demand for NAS, which jeopardises external stakeholders' perceptions of auditor independence. By moderating auditor characteristics, we show that if the incumbent auditor belongs to the Big Four, family managers' NAS purchases are similar to those of non-family managers. Moreover, the relationship between high family firm identification and the demand for NAS becomes even stronger when the incumbent auditor belongs to the Big Four.

Perceived independence or knowledge spillovers: the demand for non-audit services among family businesses

This study investigates the impact of family involvement in top management teams, family firms' life cycle stages, and family firm identification on family firms' demand for non-audit services (NAS). Based on a hand-collected panel dataset including 1,148 German firm-year observations made by 162 family firms, we show that family involvement in top management teams is negatively related to the demand for NAS, resulting in less financial bonding with the incumbent auditor. Moreover, later life cycle stage and high family firm identification positively drive the demand for NAS, which jeopardises external stakeholders' perceptions of auditor independence. By moderating auditor characteristics, we show that if the incumbent auditor belongs to the Big Four, family managers' NAS purchases are similar to those of non-family managers. Moreover, the relationship between high family firm identification and the demand for NAS becomes even stronger when the incumbent auditor belongs to the Big Four.

The Consequences of Allowing Home Country Auditors to Audit Cross-listed Firms: Evidence from Hong Kong-listed H Share Firms

We examine the consequences of a 2010 Hong Kong regulation that allows Hong Kong-listed H share firms to hire mainland Chinese audit firms to audit their financial reports. The H share firms whose audits require greater local knowledge and whose management and controlling shareholders benefit less from perceived auditor independence are more likely to switch to mainland Chinese auditors after the regulation. Following the regulation, the H share firms experience a reduction in audit fees and frequency of modified audit opinions but there is no evidence of a reduction in financial reporting quality. Further analyses show that the H share firms’ reduced frequency of modified audit opinions is likely a correction of Hong Kong auditors’ conservatism bias rather than a reduction in audit quality. Our results highlight the importance of auditors’ local knowledge and audit market competition in affecting the audit fees and audit quality of cross-listed firms.

Can Audit Committee Expertise Increase External Auditors' Litigation Risk? The Moderating Effect of Audit Committee Independence

ABSTRACTThis study examines whether the perceived independence and financial expertise of audit committee members affect external auditors' exposure to legal liability. We use an experiment in which potential jurors make judgments about auditor independence and legal liability for a case involving an audit failure. We find that perceptions of audit committee independence from management are positively associated with judgments of auditor independence and negatively associated with auditor liability. However, financial expertise of audit committee members can be a double‐edged sword. Our experiment finds that judgments of auditor liability are higher when the audit committee is perceived to have higher financial expertise but lower independence from management. In assessing litigation risk of current and prospective clients, auditors may want to carefully consider the independence of audit committee members from management, particularly when audit committee members have financial expertise. In the event of an audit failure, the financial expertise of nonindependent audit committee members can negatively affect jurors' perceptions of auditor independence and liability.

THE IMPACT OF NON-AUDIT SERVICES ON INSTITUTIONAL INVESTORS’ PERCEPTION OF AUDITORINDEPENDENCE: EVIDENCE FROM TURKEY

In recent years, the audit profession was confronted with different regulations, revised rules on Non-Audit Services (NAS) and on Auditor Independence. In-depth, Professional Accountancy Bodies amended their independence rules according to the Sarbanes-Oxley Act of 2002. For instance, the Securities Exchange Commission (SEC) and the American Institute of Certified Public Accountants (AICPA) in the USA, Capital Market Board (SPK) in Turkey made amendments to their independence rules on Non- Audit Services and on auditor independence in light of the Sarbanes-Oxley Act of 2002. The purpose of this paper is to examine whether “non- audit Services (NAS)” jeopardize institutional “investors’ perception of auditor independence in Turkey”. Therefore, the questionnaire was administered to 34 institutional investors in Istanbul, Turkey. It was generally found that institutional investors’ perception of auditor independence is not impaired at the time of the joint provision of NAS and audit Services to an audit Client.

Can Audit Committee Financial Expertise Increase External Auditors’ Litigation Risk? The Moderating Effect of Audit Committee Independence

Abstract: This study examines whether the perceived independence and financial expertise of audit committee members affect external auditors’ exposure to legal liability. We use an experiment in which potential jurors make judgments about auditor independence and legal liability for a case involving an audit failure. We find that perceptions of audit committee independence from management are positively associated with judgments of auditor independence and negatively associated with auditor liability. However, financial expertise of audit committee members can be a double-edged sword. Our experiment finds that judgments of auditor liability are higher when the audit committee is perceived to have higher financial expertise but lower independence from management. In assessing litigation risk of current and prospective clients, auditors may want to carefully consider the independence of audit committee members from management, particularly when audit committee members have financial expertise. In the event of an audit failure, the financial expertise of non-independent audit committee members can negatively affect jurors’ perceptions of auditor independence and liability.

Does the Addition of Explicit Clarification of Auditor Independence Statement to the Auditor’s Report Matter to Equity Analysts?

The Public Company Accounting Oversight Board (PCAOB) adopted a new auditing standard to enhance the relevance and usefulness of the auditor’s report. One of the changes introduced in the new reporting model is the addition of a statement that explicitly clarifies the auditor’s independence (AS 3101.09.g). We administer a survey to investigate whether explicitly clarifying the auditor’s independence in the auditor’s report affects equity analysts’ perceptions of auditor independence, perceptions of financial reporting reliability, and their judgment when it comes to making stock recommendations to clients. A total of 123 equity analysts are recruited via Qualtrics for the study. The findings of the survey provide evidence that corroborates the position of the PCAOB that explicit clarification of auditor independence provides relevant information useful to public users such as equity analysts. Our study is the first to evaluate equity analysts’ perceptions about auditor independence using the new PCAOB auditor reporting model regarding the explicit clarification of auditor independence in the auditor’s report. Our study contributes to research, practice, and policy.

Auditor‐provided nonaudit services: Post‐EU‐regulation evidence from Denmark

This survey study focuses on the relationship between the simultaneous provision of audit and nonaudit services and auditor independence‐in‐appearance as perceived by Danish stakeholders. Thereby, the perceived usefulness of the new EU public‐interest entity regulation and audit directive is evaluated.Our findings indicate that the joint provision of nonaudit and audit services is negatively associated with perceived auditor independence. However, this differs according to the type of stakeholder group. Many individual services, even those not on the EU blacklist, are regarded as problematic. Nevertheless, the relation to independence‐in‐appearance differs by type of service. The EU cap on nonaudit services fees seems to be too high. The separation between audit firms' staff that provides auditing services and staff that provides nonaudit services, and an approval of nonaudit services by the audit committee, are not regarded as helpful in enhancing auditor independence. Finally, respondents see a need to expand the strict EU regulations for audits of public‐interest entities to audits of large non‐public‐interest entities.

The Effects of Audit Rotation on Perceived Auditor Independence and Perceived Financial Statement Reliability: Further Evidence

The Effects of Audit Rotation on Perceived Auditor Independence and Perceived Financial Statement Reliability: Further Evidence

Studies on the impact of accounting information and assurance on commercial lending judgments

This paper reviews studies that have examined how accounting information impacts commercial lending judgments. Issues discussed involve the usefulness of accounting data in lending decisions, effects of different accounting methods on lenders’ judgments, bankruptcy and default judgments, and decision processes pertaining to the use of accounting information in lending decisions. Additionally, the paper reviews the research on how audits and other forms of assurance influence commercial loan officers’ judgments. Topics include the way perceived auditor independence influences loan officers’ judgments, the impact of financial statement audits and audit opinions on lending decisions, how internal control reports and other CPA firm reports influence loan decisions, ways in which audit report disclosures and wording impact lending decisions, how perceived auditor quality affects lending decisions, and the effects of limited assurance engagements on loan officers’ judgments.

Do audit firm rotation, auditor retention, and joint audits matter? – An experimental investigation of bank directors' and institutional investors' perceptions

As a consequence of the global financial and economic crisis, the European Commission recently reformed the audit market. One objective was to restore public trust in the auditing profession and thus to enhance the audit function. This study investigates whether perceptions of auditor independence and audit quality are influenced by audit firm rotation, auditor retention and joint audits, because regulators argue that these instruments can improve auditor independence and audit quality. Therefore, we conduct an experiment with bank directors and institutional investors in Germany. The results indicate a negative main effect for joint audits on perceived auditor independence, and that a rotation cycle of 24 years marginally significantly impairs participant perceptions of audit quality, compared to a rotation cycle of only ten years. Besides the main effects, planned contrast tests suggest a negative interaction between rotation and joint audit on participant perceptions of auditor independence. Moreover, a negative interaction effect is revealed between rotation after 24 years and retention on perceptions of audit quality. It is particularly noteworthy that we failed to identify a positive impact of the regulatory measures taken or supported by the European Commission on perceptions of auditor independence and audit quality.

A Qualitative Analysis of Auditor Independence in Dominica: The Views of Auditors and Corporate Accountants

This study seeks to investigate the perceptions of auditor independence in Dominica focusing primarily on the views of the auditors and corporate accountants. A qualitative study was employed using 25 auditors and corporate accountants. Interviews were conducted using a semi-structured interview schedule adapted from the Sucher and MacLullich (2004) study in Czech Republic. The study concluded that auditors in Dominica are perceived to be highly independent. It was found that the corporate accountants were generally unaware of the accounting/auditing regulatory framework in Dominica. The small business economy/unsophisticated nature of businesses, long audit tenure, the absence of a regulatory body, the closeness of society and political influence were all perceived to impair auditor independence in Dominica. Contrary, auditor independence was perceived to be enhanced by the auditors’ personal ethical values, the recently established regulatory body and the moderate competitive market in Dominica. The findings attempted to fill the gap in literature on auditor independence in small developing countries. The findings revealed that there is no regulatory body for auditors in Dominica. It was also found that the competitiveness of the audit market and the small size of the society could threaten auditor independence. However, the provision of non-audit services was not perceived to threaten auditor independence. It was also perceived that the auditors in Dominica are guided by the society’s high ethical values, which are brought about by their cultural and religious beliefs. This implies that cultural and religious pressures play a significant role in shaping the perceptions of auditor independence in Dominica.

The impact of revolving door practice and policy on nonprofessional investors’ perceptions of auditor independence

This study investigates whether an ex-auditor’s employment with an audit client impairs nonprofessional investors’ perceptions of auditor independence, and whether the strength of the US revolving door policy improves their perceptions of auditor independence. Despite nonprofessional investors owning over one-third of the US equity holdings, the literature has not examined how revolving door policy impacts their perceptions of auditor independence. Two between-subjects experiments examine these issues. The first experiment finds that investors perceive the ex-auditor’s integrity to be significant in explaining the firm’s decision to manage earnings, irrespective of the firm’s previous working relationship with the ex-auditor. The results from experiment two indicate that strengthening the revolving door policy above that of the American Institute of Certified Public Accountants’ policy does not improve perceptions of auditor independence. Academics may be interested in triangulating the independence ‘in a...

The Impact of Revolving Door Practice and Revolving Door Policy on Nonprofessional Investors' Perceptions of Auditor Independence

This study is the first to investigate (1) whether United States’ nonprofessional investors perceive an ex-auditor’s employment with an audit client as a threat to the accounting firm’s independence, and (2) whether the strength of the current United States revolving door policy improves independence. This study is motivated by the underrepresentation of nonprofessional investors in the literature, despite them owning approximately thirty-eight percent of the United States equity holdings. Two between-subjects experiments examine these issues. The first experiment finds that investors perceive the ex-auditor’s integrity as significant in explaining the firm’s decision to manage earnings, irrespective of the firm’s previous working relationship with the ex-auditor. The results from experiment two indicate that investors’ perceptions of revolving door firms’ independence do not significantly improve by strengthening the revolving door policy above the American Institute of Certified Public Accountants’ initial policy. Therefore, accounting regulators may consider reducing the stringency of the current revolving door policy to attract prospective audit employees to public accounting. Academics may also be interested in the triangulation of the independence “in appearance” findings in this study the independence “in fact” findings in prior research.

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

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.