Takeover Premiums and the Perception of Auditor Independence and Reputation

Abstract

This study investigates if there is a positive association between takeover premiums and the bidder's perception of target firm auditor reputation and independence. Using auditor size as a proxy for auditor reputation, the results indicate that target shareholders receive a higher takeover premium when a Big 4 auditor audits the target firm in the year prior to the takeover announcement. This result is only significant however in the period prior to the highly publicised audit failures. The impact of perceived auditor independence on takeover premiums is studied using the levels and size of non-audit service (NAS) fees provided by the target firm auditor. Using three proxies for auditor independence, the results do not show an association between perceived auditor independence and takeover premiums. This finding is robust to partitioning the sample by auditor size, takeover hostility and splitting the sample into takeovers pre-and post-the corporate scandals that occurred in 2002.

Review of Post‐CLERP 9 Australian Auditor Independence Research

“…Using data from 1996–2006 to investigate the association between takeover premiums and the bidder's perception of target firm auditor reputation and independence, the results indicate that in hostile takeovers target shareholders receive a higher takeover premium when a Big 4 auditor audits the target firm prior to the takeover. Similar to the results in Azizkhani et al (), the Bugeja () result is only significant in the period prior to the highly publicised audit failures.…”

“…They claim their findings indicate the provision of NAS by the incumbent auditor does not compromise auditor independence – despite acknowledging a significant relation between discretionary accruals and the logarithm transformation of audit and non‐audit fees. Consistent with the conclusions of Patel and Saune () and Rusmin et al (), Bugeja () does not find any significant association between takeover premiums and the levels of NAS provided by the target firm auditor throughout 1996–2006. The results are robust to partitioning before and after 2002.…”

“…However, Bugeja () indicates the loss of Big 4 auditor relative value probably continued through 2006. Using data from 1996–2006 to investigate the association between takeover premiums and the bidder's perception of target firm auditor reputation and independence, the results indicate that in hostile takeovers target shareholders receive a higher takeover premium when a Big 4 auditor audits the target firm prior to the takeover.…”

“…In response to concerns that auditor‐provided NAS are a threat to auditor independence, CLERP 9 introduced mandatory disclosure in the annual report of fees paid for NAS, and an audit committee declaration that any purchased NAS is compatible with auditor independence. There are mixed results in this regard in studies using data prior to CLERP 9 (Ye et al ; Ruddock et al ; Gul et al ; Carey et al ; Patel and Saune ; Bugeja ), and contemporaneous with CLERP 9 (Rusmin et al ; Wines , ; Bugeja ; Hossain ).…”

Corporate reputation in management research: a review of the literature and assessment of the concept

“…Cluster 2 is rooted in accounting and revolves around the topic of auditing. The concept of reputation is mainly applied in the context of auditing firms and associated with quality (e.g., Bugeja 2011;Koh et al 2013;Lim and Tan 2008;Singh 2013). Auditor reputation proves to be linked to a high quality of auditing (e.g., Lim et al 2013;Swanquist and Whited 2015) and reporting (e.g., Cao et al 2012;Cassell et al 2016).…”