Is Mandated Independence Necessary for Audit Quality?

Posted: 14 Mar 2011 Last revised: 13 Jun 2013

See all articles by Karim Jamal

Karim Jamal

University of Alberta - Department of Accounting, Operations & Information Systems

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

Date Written: March 11, 2011

Abstract

Independence (in fact as well as in appearance) is widely thought to be necessary for the quality of audits, and audit quality is often equated with independence. Private incentives to demand (and supply) independent certification of financial statements are thought to be insufficient, thus the need to mandate independence through regulation. This study presents data from a field experiment on the unregulated market for certification of baseball cards to assess the role of independence vis-à-vis other auditor attributes such as competence, price, and service on audit quality. In our field experiment, we examine prices of baseball cards sold on eBay with or without third party certification. In addition, the certifier was either independent or deeply immersed in providing other services to market participants. We find that market participants pay a significant premium for certified cards. Certifiers who are deeply immersed (and therefore apparently less independent) also provide higher quality service in the form of being stricter graders, command larger price premiums, and dominate in market share. Implications for independence and audit quality are discussed.

Keywords: independence, regulation, certification services, financial reporting, accounting

JEL Classification: M49, G34, G38

Suggested Citation

Jamal, Karim and Sunder, Shyam, Is Mandated Independence Necessary for Audit Quality? (March 11, 2011). Accounting Organizations and Society, Vol. 36 (45) May/June: 284-292, 2011; University of Alberta School of Business Research Paper 2013-1021. Available at SSRN: https://ssrn.com/abstract=1783936

Karim Jamal (Contact Author)

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-5829 (Phone)
780-492-3325 (Fax)

Shyam Sunder

Yale University - School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6160 (Phone)

HOME PAGE: http://www.som.yale.edu/faculty/sunder/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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