Strong Corporate Governance and Audit Firm Rotation: Effects on Judges' Independence Perceptions and Litigation Judgments

The Sarbanes-Oxley (SOX) legislation mandated modest threshold levels of corporate board independence and expertise, as well as audit partner (not firm) rotation. One objective was to create an environment supportive of enhanced actual and perceived auditor independence. This study examines whether...

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Bibliographic Details
Published in:Accounting horizons 2006-09, Vol.20 (3), p.253-270
Main Authors: Jennings, Marianne Moody, Pany, Kurt J., Reckers, Philip M. J.
Format: Article
Language:English
Subjects:
Accountant independence
Accounting firms
Attitudes
Audit committees
Audit quality
Audited financial statements
Auditing
Auditors
Boards of directors
Corporate governance
Financial reporting
Hypotheses
Independence
Judges
Judges & magistrates
Legislation
Legislators
Liability
Litigation
Objectivity
Perception
Perceptions
Quality standards
Studies
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Summary:The Sarbanes-Oxley (SOX) legislation mandated modest threshold levels of corporate board independence and expertise, as well as audit partner (not firm) rotation. One objective was to create an environment supportive of enhanced actual and perceived auditor independence. This study examines whether perceptions of auditor independence and auditor liability are incrementally influenced by further strengthening corporate governance and by rotating audit firms. Our experimental study addresses these questions by analyzing responses of 49 judges attending a continuing education course at the National Judicial College. The experiment manipulates corporate governance at two levels (minimally compliant with current corporate governance requirements versus strong) and auditor rotation at two levels (partner rotation versus audit firm rotation). We find that strengthening corporate governance (beyond minimal SOX levels) and rotating audit firms (compared to partner rotation) lead to enhanced auditor independence perceptions. We also find that judges consider auditors less likely to be liable for fraudulently misstated financial statements when firm rotation is involved in a minimally compliant corporate governance environment.
ISSN:0888-7993
1558-7975
DOI:10.2308/acch.2006.20.3.253