Threats to Auditor Independence: The Impact of Relationship and Economic Bonds

This study examines the association of a comprehensive set of auditor-client relationship bonds (audit firm tenure, audit engagement partner tenure, long duration director-auditor relationships, and alumni affiliation) with the level of economic bonds provided to an audit client (nonaudit services [...

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Bibliographic Details
Published in:Auditing : a journal of practice and theory 2011-02, Vol.30 (1), p.121-148
Main Authors: Ye, Ping, Carson, Elizabeth, Simnett, Roger
Format: Article
Language:English
Subjects:
Accountant independence
Accounting firms
Audit committees
Audit quality
Audited financial statements
Auditing
Auditors
Client relationships
Economic reform
Hypotheses
Marketing
Nonaudit services
Personal relationships
Purchasing
Regulatory reform
Studies
Tenure
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Summary:This study examines the association of a comprehensive set of auditor-client relationship bonds (audit firm tenure, audit engagement partner tenure, long duration director-auditor relationships, and alumni affiliation) with the level of economic bonds provided to an audit client (nonaudit services [NAS]). We further examine the effect of these economic and relationship bonds on auditor independence in the context of nonaudit services fees and the propensity to issue going-concern opinions. It is these economic and relationship bonds that have attracted the interest of regulators in their consideration of audit quality. This study was undertaken in Australia in 2002, which provided a context in which all these relationships could be examined before new regulations were introduced. Results show that audit firm tenure and alumni affiliation are associated with clients purchasing auditor-provided NAS, with stronger associations for clients with low agency costs. We further find that long audit engagement partner tenure and a joint effect of auditor-provided NAS and alumni affiliation have a negative effect on the auditor’s propensity to issue a going-concern opinion.
ISSN:0278-0380
1558-7991
DOI:10.2308/aud.2011.30.1.121