How Do Regulatory Reforms to Enhance Auditor Independence Work in Practice?

Posted: 3 Nov 2012 Last revised: 12 Jun 2013

See all articles by Krista J. Fiolleau

Krista J. Fiolleau

University of Waterloo

Kris Hoang

University of Alabama - Culverhouse College of Commerce & Business Administration

Karim Jamal

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

Shyam Sunder

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

Date Written: September 27, 2012

Abstract

We conducted a field study of the process by which a company and prospective auditors court each other and enter an engagement. The Request-for-Proposal (RFP) process we observed had been triggered by an audit partner rotation and governed by recent legislation empowering the audit committee to make the auditor selection decision. The RFP resulted in a change in audit firm, and the process was characterized by: (1) asymmetry of power with significant management control in selection of the external auditor; and (2): auditors’ repeated demonstrations of responsiveness and commitment to management, rather than the audit committee, to differentiate themselves from other audit firms. Our study raises concerns that reforms designed to promote independence may not operate in the manner intended by regulators, as auditors’ efforts to win the engagement were directed toward management, and the audit committee delegated the auditor appointment decision to management.

Keywords: Audit committee, auditor rotation, auditor independence, field study

JEL Classification: M41, M42

Suggested Citation

Fiolleau, Krista J. and Hoang, Kris and Jamal, Karim and Sunder, Shyam, How Do Regulatory Reforms to Enhance Auditor Independence Work in Practice? (September 27, 2012). Contemporary Accounting Research, Forthcoming; University of Alberta School of Business Research Paper No. 2013-1016. Available at SSRN: https://ssrn.com/abstract=2170404

Krista J. Fiolleau

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada

Kris Hoang (Contact Author)

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States

Karim Jamal

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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