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

Koch, Christopher ; Weber, Martin ; Wüstemann, Jens

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URN: urn:nbn:de:bsz:180-madoc-314819
Document Type: Working paper
Year of publication: 2011
Place of publication: Mannheim
Publication language: English
Institution: Business School > ABWL u. Finanzwirtschaft, insbes. Bankbetriebslehre (Weber 1993-2017)
MADOC publication series: Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre (Weber) > Working Papers
Subject: 330 Economics
Classification: JEL: C90 , K22 , M42,
Subject headings (SWD): Wirtschaftsprüfung , Verhaltensökonomie , Corporate Governance , Internes Kontrollsystem , Test
Individual keywords (German): Wirtschaftsprüfung , Verhaltensökonomik , Corporate Governance , Internes Kontrollsystem , Test
Keywords (English): auditor independence , accountability pressure , client retention incentives , oversight board , behavioural experiment
Abstract: 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.

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