Client acceptance and continuation decisions

https://egrove.olemiss.edu/dl_proceedings/1049/thumbnail.jp

Can auditors be independent? – Experimental evidence on the effects of client type

Recent regulatory initiatives stress that an independent oversight board, rather than the management board, should be the client of the auditor. In an experiment, we test whether the type of client affects auditors’ independence. Unique features of the German institutional setting enable us to realistically vary the type of auditors’ client as our treatment variable: we portray the client either as the management preferring aggressive accounting or the oversight board preferring conservative accounting. We measure auditors’ perceived client retention incentives and accountability pressure in a post-experiment questionnaire to capture potential threats to independence. We find that the type of auditors’ client affects auditors’ behaviour contingent on the degree of the perceived threats to independence. Our findings imply that both client retention incentives and accountability pressure represent distinctive threats to auditors’ independence and that the effectiveness of an oversight board in enhancing auditors’ independence depends on the underlying threat

Relevant but Delayed Information in Negotiated Audit Fees: Evidence from Stock Price Crashes

Audit fee negotiations conclude the first quarter of the year under audit, yet the audit fee is not disclosed until the first quarter of the following year. We conjecture that negotiated audit fees impound auditor’s consequential private, client-specific knowledge about events investors will eventually learn. We demonstrate that year-to-year changes in audit fees have an economically meaningful positive association with proxies for idiosyncratic risk — future negative stock performance (crashes, skewness, and volatility), debt downgrades and lawsuits. This relation holds in the year under audit as well as the following year. The results suggest that negotiated audit fees contain information meaningful to investors that if disclosed when known instead of in the following year, would reduce information asymmetry.https://fisher.osu.edu/supplements/10/11702/Jenkins%20OSU_presentationpaper.pd