Auditor Independence in a Private Firm and Low Litigation Risk Setting

Abstract

We examine the issue of auditor independence in a unique setting. Specifically, we test for auditor independence impairment among (1) private client firms, for which the risk of auditor reputation loss is lower than for publicly traded firms, and (2) in a low litigation environment (i.e., Norway) that further reduces the expected costs to the auditor associated with independence impairment. We have thus chosen a setting that gives independence impairment its best chance of being detected if it exists. Using a large sample of private Norwegian firms, we analyze whether auditors who receive higher fees are less likely to issue modified opinions. Despite the low litigation risk and the reduced reputation risk, our empirical results provide no evidence that auditors compromise their independence through fee dependence. These results are robust to controlling for the expected portion of fees, to different sample specifications, to the use of both levels and changes specifications, and to a number of sensitivity analyses.

Non-audit Services and Audit Quality: Evidence from Private Firms

“…In finding some positive association between NAS and audit quality, the results deviate to some extent from the findings related to Norwegian private firms reported by Hope and Langli (2010). The measures of audit quality and NAS used in the two studies are largely different, as is the level of taxbook alignment applied in Norway compared to Sweden.…”

“…Private firms are typically small and medium-sized enterprises (SMEs), but despite their predominance in the world economy very little research has been done on NAS and audit quality in a private firm setting. One noticeable exception is a recent paper by Hope and Langli (2010). In their examination of a large sample of private Norwegian firms they found no association between auditors' fees and the propensity to issue a going concern opinion.…”

“…On the whole, there is not much evidence to suggest that NAS is significantly associated with audit quality in public firms. The one prior study on private firms failed to find any association between (abnormal) NAS fees and auditors' propensity to issue a going concern opinion (Hope and Langli, 2010). As there are also contradictory arguments on how NAS is related to audit quality, the first hypothesis is formulated as follows:…”

“…At audit firm level, dependency on a single client is even lower. Economic bonding is thus unlikely to have a major impact on audit quality in private firms, as suggested by Hope and Langli (2010).…”

Audit office size, audit quality and audit pricing: evidence from small- and medium-sized enterprises

“…The control variables in the regression were mainly based on Hope and Langli (2010), who studied fees for a sample of privately held Norwegian companies. …”