Auditor Independence in a Private Firm and Low Litigation Risk Setting

58 Pages Posted: 21 Nov 2008 Last revised: 15 Jul 2009

See all articles by Ole-Kristian Hope

Ole-Kristian Hope

University of Toronto - Rotman School of Management

John Christian Langli

BI Norwegian Business School - Department of Accounting, Auditing and Business Analytics

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Date Written: July 6, 2009

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.

Keywords: Auditing, auditor independence, private firms, litigation risk, reputation, accounting, professional ethics

JEL Classification: M49, M47, G34, G38, K22

Suggested Citation

Hope, Ole-Kristian and Langli, John Christian, Auditor Independence in a Private Firm and Low Litigation Risk Setting (July 6, 2009). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1304154

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

John Christian Langli

BI Norwegian Business School - Department of Accounting, Auditing and Business Analytics ( email )

N-0442 Oslo
Norway

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