Can Auditors Be Independent? – Experimental Evidence on the Effects of Client Type

Koch, Christopher; Weber, Martin; Wüstemann, Jens

doi:10.2139/ssrn.1004703

Cited by 7 publications

(3 citation statements)

References 48 publications

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“…Research on this complex accountability setting for internal auditors is scarce and we mainly draw on the external auditing and psychology literature to develop our first hypothesis. Prior studies using external auditors as participants provide evidence that auditors tend to tailor their judgment to their specific audience (Buchman, Tetlock & Reed, ; Hackenbrack & Nelson, ; Koch, Weber & Wüstemann, ), i.e., to the views of their clients (Bamber & Iyer, ) and superiors (Koonce, Anderson & Marchant, ). The influence of superiors on auditor judgments has been demonstrated in a variety of contexts (e.g., Milgram, ; DeZoort & Lord, ; Brief et al ., ; Lord & DeZoort, ; Davis et al ., ).…”

Section: Background and Hypothesesmentioning

confidence: 99%

The Importance of the Chief Audit Executive's Communication: Experimental Evidence on Internal Auditors' Judgments in a ‘Two Masters Setting’

2015

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The position of an internal audit function (IAF) as a 'servant of two masters' (i.e., management and the audit committee) may lead to a conflict of priorities. In this setting, the tone at the top set by the Chief Audit Executive (CAE) plays a critical role in balancing the potentially competing priorities of the 'two masters'. We test two hypotheses in a mixed experimental design with the communicated preferences of the CAE to subordinates (cost reduction vs. effectiveness of internal controls) as a between-subjects factor, and levels of ambiguity (low, medium, high) manipulated within-subjects. Findings suggest that the emphasis in the CAE's message can influence internal auditors' judgments, and such influence is more pronounced when task ambiguity is high, resulting in the elimination of a significantly greater number of internal controls and the design of less effective processes. We discuss implications of our results for modern IAFs and the role of the CAE.

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Section: Background and Hypothesesmentioning

confidence: 99%

The Importance of the Chief Audit Executive's Communication: Experimental Evidence on Internal Auditors' Judgments in a ‘Two Masters Setting’

2015

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“…7. These topics are popularly used in audit-related research (Jimbalvo and Wilner, 1985; Buchman et al , 1996; Libby and Kinney, 2000; Koch, et al , 2012). …”

Section: Notesmentioning

confidence: 99%

Audit fees via an indirect payment channel and professional skepticism

Kim

Pae

et al. 2018

MAJ

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Purpose This paper aims to examine the merit of an indirect payment system for audit fees, a system where an intermediary collects fees from the auditee and then pays this audit fee to the auditor. Design/methodology/approach Big 4 auditors and professional analysts in South Korea participated in an experiment and survey to investigate whether the change in the payment channel (from direct to indirect) of audit fees positively impacts auditors’ decision-making. Findings The authors find evidence that the indirect payment of audit fees is positively associated with professional skepticism. Research limitations/implications This paper, by highlighting the potential for alternate auditor payment channels to improve the quality of auditor judgments, motivates future research in this area. Practical implications Qualified by the need for further research, the potential merit in an indirect payment system may have implications for audit regulators. Social implications An indirect payment channel has the potential to improve public perceptions of the audit function, thereby elevating society’s confidence in auditor opinions and improving the effectiveness and efficiency with which scarce resources are distributed within society. Originality/value This study is one of the first that looks into a systematic change in audit fee payment channel and how an indirect payment system of audit fees impacts professional skepticism.

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“…We are aware of a handful of studies examining the effect of appointment power on audit quality (Moore, Tanlu, and Bazerman 2010;Koch, Weber, and Wüstemann 2012;Dhaliwal et al 2015), but they all focus on auditor judgments and outcomes rather than financial statement user assessments. This makes our study the first to our knowledge to examine financial statement user responses to variations in audit committee appointment power.…”

Section: Audit Committee Appointment Powermentioning

confidence: 99%

The Impact of the Auditor Selection Process and Audit Committee Appointment Power on Investment Recommendations

Gold

Klynsmit

Wallage

et al. 2017

Auditing: A Journal of Practice &Amp; Theory

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After the global 2007-2008 financial crisis, regulatory bodies proposed alternative auditor selection processes to enhance auditor independence such as mandatory audit firm rotation or mandatory tendering (i.e., rotation that allows for the current auditor to be reappointed). However, these alternative selection processes may not be effective if management has substantial influence over auditor appointment decisions. We posit that disclosures of high appointment power of the audit committee will enhance the perceived effectiveness of rotation and tendering, and thus increase investment recommendations. In an experimental study involving 118 experienced investment professionals, we examine the impact of the auditor selection process (mandatory rotation, mandatory tendering, and voluntary selection) and the appointment power of the audit committee (high, low) on investment recommendations. We find that audit committee appointment power affects investment recommendations only when a possible auditor change is anticipated (i.e., in the case of rotation and tendering), but not when the auditor selection is voluntary. Further, rotation and tendering lead to a higher recommended investment likelihood than voluntary selection, but only when an audit committee has high appointment power. In all, the findings underscore that investors do not view auditor selection processes in isolation of a company's internal corporate governance mechanisms.

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Can Auditors Be Independent? – Experimental Evidence on the Effects of Client Type

Cited by 7 publications

References 48 publications

The Importance of the Chief Audit Executive's Communication: Experimental Evidence on Internal Auditors' Judgments in a ‘Two Masters Setting’

The Importance of the Chief Audit Executive's Communication: Experimental Evidence on Internal Auditors' Judgments in a ‘Two Masters Setting’

Audit fees via an indirect payment channel and professional skepticism

The Impact of the Auditor Selection Process and Audit Committee Appointment Power on Investment Recommendations

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