Client influence and auditor independence revisited: Evidence from auditor resignations |
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| Institution: | 1. School of Business, La Salle University, 1900 West Olney Avenue, Philadelphia, PA 19141, United States;2. Fox School of Business, Temple University, 1801 Liacouras Walk, Philadelphia, PA 19122, United States;1. School of Business, University of Connecticut, 2100 Hillside Rd., Unit 1041A, Storrs, CT 06269, United States;2. College of Business, Colorado State University, 501 W. Laurel St., Fort Collins, CO 80523, United States;1. Oregon State University, United States;2. Purdue University, United States;1. Western Michigan University, United States;2. George Mason University, United States;3. Florida Atlantic University, United States;1. Data & Text Mining Laboratory, Jerusalem School of Business Administration, Israel;2. Rutgers Business School – Newark and New Brunswick, Rutgers University, Department of Accounting and Information Systems, United States;3. Stern School of Business Administration, New York University and, QMA LLC, United States;4. Freeman College of Management, Bucknell University, United States;1. University of Richmond, Richmond, VA 23173, United States;2. Bentley University, Waltham, MA 02452, United States |
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| Abstract: | Financial scandals such as the Enron-Andersen debacle provoke concerns that auditors lack independence when faced with influential clients. Unlike previous studies that examine whether client influence affects audit quality on ongoing engagements (providing mixed results), we investigate whether client influence (which engenders “independence risk”) at the audit-office level affects auditor resignations from high engagement-risk clients. We construct summary measures of engagement risk, using client disclosures on Form 8-K filings, potential risk factors (e.g., litigation risk), and auditor action (e.g., issuance of a going concern opinion) on the previous year’s financial statements. Focusing on risky clients, we find that auditors are more likely on average to resign from influential clients, and this positive association holds for auditors that are less likely to have mechanisms in place to mitigate independence risk. Also, importantly, influential clients are prevalent across the spectrum of client size, and the positive association between client influence and auditor resignations holds for both large and small clients. |
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| Keywords: | Client influence Bargaining power Auditor change Auditor independence Independence risk AICPA SEC PCAOB |
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