Client Pressure and Auditor Independence: Evidence from the 'Great Recession' of 2007-2009

59 Pages Posted: 13 May 2011 Last revised: 24 Mar 2017

See all articles by Michael Ettredge

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Elizabeth Emeigh Fuerherm

University of Kansas

Chan Li

University of Kansas

Feng Guo

Iowa State University - Department of Accounting and Finance

Date Written: March 23, 2017

Abstract

This study investigates whether auditors’ independence was compromised by client audit fee pressures during the recession of December 2007 through June 2009. We hypothesize that clients able to extract fee concessions from auditors during the recession, when audit risk increased, might also have been able to obtain more favorable audit opinions. We find that auditors are less likely to issue first-time going concern (GC) opinions to clients that exert fee pressure in 2008, but do not find this result in other years, including several years before and following the central recession year of 2008 (i.e. 2005-2007, 2009-2011). Our results suggest that the stringent economic environment of the recession may have weakened auditor independence for clients capable of exerting audit fee pressure, but this effect was restricted to 2008, the heart of the recession. We also find compensating payments (in the form of expected total fee increases or high current-year NAS fees) from fee pressure clients strengthen the negative association between fee pressure and auditors’ GC opinions.

Keywords: audit fee pressure, independence, recession, going concern opinion

JEL Classification: M40, M42

Suggested Citation

Ettredge, Michael L. and Fuerherm, Elizabeth Emeigh and Li, Chan and Guo, Feng, Client Pressure and Auditor Independence: Evidence from the 'Great Recession' of 2007-2009 (March 23, 2017). Journal of Accounting and Public Policy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1838485 or http://dx.doi.org/10.2139/ssrn.1838485

Michael L. Ettredge (Contact Author)

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

Elizabeth Emeigh Fuerherm

University of Kansas ( email )

1415
Lawrence, KS 66045
United States

Chan Li

University of Kansas ( email )

Capitol Federal Hall
Lawrence, KS 66045
United States
7857661277 (Phone)
66045 (Fax)

Feng Guo

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

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