Is mandated independence necessary for audit quality? |
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| Authors: | Karim Jamal Shyam Sunder |
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| Institution: | 1. School of Business, University of Alberta, Edmonton, Alberta, Canada T6G 2R6;2. School of Management, Yale University, P.O. Box 208200, 135 Prospect St., New Haven, CT 06520-8200, USA;1. University of Southern California, USA;2. University of Texas, Dallas, USA;1. Scheller College of Business, Georgia Institute of Technology, United States;2. Department of Accounting, College of Business and Economics, Lehigh University, United States;3. Department of Economics, Hunter College, City University of New York, United States;4. Chulalongkorn Business School, Chulalongkorn University, Charoen Pokphand Group Company Limited, Thailand;1. Montclair State University, One Normal Avenue, Montclair, NJ 07043, USA;2. Rutgers, the State University of New Jersey, One Washington Park, Newark, NJ 07102, USA;1. Fuqua School of Business, Duke University, Durham, NC 27708, USA;2. National Bureau of Economic Research, Cambridge, MA 02912, USA;1. Universitas Multimedia Nusantara, Scientia Garden, Jl Boulevard Gading Serpong, Tangerang 15811, Indonesia;2. Faculty, Universitas Multimedia Nusantara, Scientia Garden, Jl Boulevard Gading Serpong, Tangerang 15811, Indonesia;1. Department of Management, Marketing and Entrepreneurship, University of Canterbury, New Zealand;2. Department of Management, Monash University, Australia;3. Department of Logistics and Maritime Studies, The Hong Kong Polytechnic University, Hong Kong, China |
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| Abstract: | Independence (in fact as well as in appearance) is widely thought to be necessary for the quality of audits, and audit quality is often equated with independence. Private incentives to demand (and supply) independent certification of financial statements are thought to be insufficient, thus the need to mandate independence through regulation. This study presents data from a field experiment on the unregulated market for certification of baseball cards to assess the role of independence vis-à-vis other auditor attributes such as competence, price, and service on audit quality. In our field experiment, we examine prices of baseball cards sold on eBay with or without third party certification. In addition, the certifier was either independent or deeply immersed in providing other services to market participants. We find that market participants pay a significant premium for certified cards. Certifiers who are deeply immersed (and therefore apparently less independent) also provide higher quality service in the form of being stricter graders, command larger price premiums, and dominate in market share. Implications for independence and audit quality are discussed. |
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