Can Auditors Be Independent? – Experimental Evidence on the Effects of Client Type

39 Pages Posted: 4 Aug 2007 Last revised: 23 May 2012

See all articles by Christopher Koch

Christopher Koch

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management

Martin Weber

University of Mannheim - Department of Banking and Finance

Jens Wüstemann

University of Mannheim - Accounting and Taxation

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2011

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.

Keywords: auditor independence, accountability pressure, client retention incentives, oversight board, behavioural experiment

JEL Classification: M42

Suggested Citation

Koch, Christopher and Weber, Martin and Wüstemann, Jens, Can Auditors Be Independent? – Experimental Evidence on the Effects of Client Type (August 1, 2011). Available at SSRN: https://ssrn.com/abstract=1004703 or http://dx.doi.org/10.2139/ssrn.1004703

Christopher Koch (Contact Author)

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management ( email )

Mainz
Germany
+49 (6131) 3929990 (Phone)

HOME PAGE: http://https://www.cg.bwl.uni-mainz.de/

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

Jens Wüstemann

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

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