Abstract

http://ssrn.com/abstract=1876823
 
 

References (31)



 


 



Consulting Revenue Sharing, Auditor Effort and Independence, and the Regulation of Auditor Compensation


Xiaohong Liu


The University of Hong Kong

Derek Chan


University of Hong Kong - School of Business, Faculty of Business and Economics

July 1, 2011

Journal of Accounting and Public Policy, 31 (2): 139-160.

Abstract:     
The joint provision of audit and non-audit services by audit firms to their audit clients has posed a threat to auditor independence. To mitigate the independence problem, the U.S. Securities and Exchange Commission (SEC) issued a regulation (SEC 2003) that prohibits audit partners from receiving compensation for the sale of non-audit services to their audit clients. This study examines the effects of this regulatory change on the effort and reporting decisions of audit partners. We show that partners in an audit firm strategically change the firm’s liability-sharing rule. As a consequence, the regulation restores truthful reporting but has an undesirable negative effect on audit effort. The effect of the regulation on the welfare of the economy (defined as the total payoff to both audit firms and their clients) hinges on the tradeoff between the benefit of the regulation, which is derived from the inducement of truthful reporting, and the cost of the regulation, which results from less diligent audit work. We show that the regulation is more likely to increase the welfare in a strong legal regime (where the legal liability cost of auditor litigation is high) than in a weak legal regime.

Keywords: Regulation of Auditor Compensation, Sharing Rules of Audit Firms, Auditor Effort, Truthful Reporting

JEL Classification: M41, G28

Accepted Paper Series





Not Available For Download

Date posted: July 5, 2011 ; Last revised: September 7, 2012

Suggested Citation

Liu, Xiaohong and Chan, Derek, Consulting Revenue Sharing, Auditor Effort and Independence, and the Regulation of Auditor Compensation (July 1, 2011). Journal of Accounting and Public Policy, 31 (2): 139-160.. Available at SSRN: http://ssrn.com/abstract=1876823

Contact Information

Xiaohong Liu (Contact Author)
The University of Hong Kong ( email )
School of Business
The University of Hong Kong
Hong Kong
Derek K. Chan
University of Hong Kong - School of Business, Faculty of Business and Economics ( email )
K.K. Leung Building
Pokfulam Road
Hong Kong
China
+852 3917-8357 (Phone)
+852 2858-5614 (Fax)
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