The Impact of Economic Bonding on Audit Quality: Evidence from Audit Working Papers

Posted: 30 Jan 2015

See all articles by Joost van Buuren

Joost van Buuren

Nyenrode Business University

Barbara Majoor

Independent

Leen Paape

Nyenrode Business University

Arnold Wright

Northeastern University - Accounting Group

Date Written: January 21, 2015

Abstract

In this study we examine the effect of auditor economic bonding (financial dependency on a client) on audit quality. We consider financial dependency as either abnormally high fees in relation to expected hours or vice versa. We consider audits to have credence goods properties where the client has limited ways to assess audit quality that is (likely to be) delivered. This setting provides opportunities for different auditor business strategies. We base our results on a unique, proprietary dataset of audit fees, audit hours, materiality, risk assessments, error detection and auditor reporting decisions taken from the working papers of 681 audit engagements with 2,209 engagement-year observations over the period 2006 to 2011. First, we predict and find that high effort audit engagements (i.e., abnormal high audit hours) are associated with a higher probability of detecting audit differences than low effort audit engagements. Simultaneously, we predict and find that financial dependency on a client lowers the audit quality achieved by high effort as reflected by waiving proposed audit differences. Moreover, our results suggest that auditors facing high independence threats are more highly associated with overstated earnings than when independence threats are low. Consequently, the findings suggest that the negative effects of financial dependency, i.e. economic bonding threats, are a result of the auditors’ business relationship with a given client and how the auditor responds to competitive markets.

Keywords: Audit Quality, Auditor Business Strategy, Audit Partner, Audit Working Papers

JEL Classification: M40, M41, M42, M48

Suggested Citation

van Buuren, Joost and Majoor, Barbara and Paape, Leen and Wright, Arnold, The Impact of Economic Bonding on Audit Quality: Evidence from Audit Working Papers (January 21, 2015). Northeastern U. D’Amore-McKim School of Business Research Paper No. 2553080, Available at SSRN: https://ssrn.com/abstract=2553080

Joost Van Buuren (Contact Author)

Nyenrode Business University ( email )

Straatweg 25
3621 BG BREUKELEN
Netherlands

HOME PAGE: http://www.nyenrode.nl

Barbara Majoor

Independent ( email )

Leen Paape

Nyenrode Business University ( email )

Straatweg 25
P.O. Box 130
Breukelen, 3620 AC
Netherlands

Arnold Wright

Northeastern University - Accounting Group ( email )

406 Hayden Hall
United States

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