Auditor Independence in Fact: Research, Regulatory, and Practice Implications Drawn from Experimental and Archival Research

Abstract

SYNOPSIS Notwithstanding various safeguards intended to enhance auditor independence in fact, regulators including the PCAOB have continued to express concerns that auditors, at times, are failing to maintain an appropriate level of independence. In this paper, we provide an analysis of selected academic studies related to auditor independence to offer readers a foundation on which to evaluate the substantial body of research in the area and to understand the mixed findings reported in experimental and archival studies. We discuss issues surrounding the research designs and methods used in prior work, highlighting challenges that face researchers. Subsequently, we take stock of what we have learned from our analysis and consider the research, regulatory, and practice implications of our conclusions. We also offer avenues for future research and highlight specific issues that warrant further investigation.

When the Client Is a Former Auditor: Auditees' Expert Knowledge and Social Capital as Threats to Staff Auditors' Operational Independence

“…Second, in most of the behavioral and theoretical models of auditor‐client interpersonal relationships, the client's environment is represented as acting on auditors' cognitive mechanisms in a way that generates an almost automatic response, stripping both auditors and clients of their agentic capabilities and social influence. For example, Jenkins and Haynes (, 143) find that “audit judgments regarding contingent liability disclosure may be biased toward a client's preference if the preference is received prior to evidence evaluation … but not if the preference is received at the end of the evidence evaluation process.” As Church et al (, 218) observe, “Much experimental research suggests that motivational and cognitive biases negatively affect the auditors' judgments and decision making, which may hinder auditors' ability to maintain their independence.” In particular, clients' agency is often simplified and reduced to the bare essentials behind the relatively vague notion of “pressures.” Yet, clients, like any other individuals, “form intentions that include action plans and strategies for realizing them” (Bandura , 164). Like any other individual, they also aim to exert social influence on others by mobilizing power resources (Raven ).…”

The Impact of Consulting Services on Audit Quality: An Experimental Approach

“…In general, archival research finds little evidence of an incremental effect of the joint provision of consulting and auditing on audit quality (Defond, Raghunandan, and Subramanyam [], Ashbaugh, Lafond, and Mayhew [], Myers, Myers, and Omer [], Church et al. []). Given the concentrated audit market, endogeneity concerns over auditor hiring decisions, and the absence of control firms, the joint provision of audit and consulting is not easily examined using archival data and econometric models (Schneider, Church, and Ely [], Church et al.…”

“…Given the concentrated audit market, endogeneity concerns over auditor hiring decisions, and the absence of control firms, the joint provision of audit and consulting is not easily examined using archival data and econometric models (Schneider, Church, and Ely [], Church et al. []). Recent archival studies employing more focused tests and experimental research generally have found evidence that an economic bond between clients and auditors biases auditor judgment (see Church et al.…”

“…Recent archival studies employing more focused tests and experimental research generally have found evidence that an economic bond between clients and auditors biases auditor judgment (see Church et al. []). Our study makes a unique contribution by studying consulting's impact on norms rather than economic bonding.…”

Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Rulemaking Docket Matter No. 042: PCAOB Release No. 2017-005, Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard— Dividing Responsibility for the Audit with Another Accounting Firm

“…Because the ''auditor's processes for determining compliance with the SEC independence requirements and PCAOB independence and ethics requirements'' (paragraph .B4.a) are part of each audit firm's quality control (QC) program (Bedard, Deis, Curtis, and Jenkins 2008;Church, Jenkins, McCracken, Roush, and Stanley 2015), and firms' QC programs are regularly inspected by the PCAOB, information about the independence process at the other auditor's firm should be readily available to the lead auditor.…”