Client Influence and Auditor Independence Revisited: Evidence from Auditor Resignations

48 Pages Posted: 24 Aug 2017 Last revised: 12 Oct 2017

See all articles by Tom Adams

Tom Adams

University of Connecticut

Jagan Krishnan

Temple University - Department of Accounting

Jayanthi Krishnan

Temple University - Department of Accounting

Date Written: July 1, 2017

Abstract

Financial scandals such as those surrounding the Enron-Andersen debacle provoke concerns that auditors lack independence when faced with influential clients, and are unwilling to respond to client risks by resigning. Unlike previous studies that examine whether client influence affects audit quality on ongoing engagements (and provide mixed results), we investigate whether office-level client influence affects auditor resignations from risky clients for whom the resignation decision is most salient. Using a sample of risky clients, we find that (1) auditors are more likely on average to resign from influential clients, and (2) this positive association holds for non-Big N auditors, auditors in smaller offices, and non-specialist auditors. We speculate that audit firms or audit offices that have inadequate mechanisms to mitigate independence risk use resignation as a tool to counter such risk. This is consistent with the suggestions offered in professional guidance. Also, importantly, the effect of client influence is distinct from that of client size. Influential clients are prevalent across the spectrum of absolute client size, and the positive association between client influence and auditor resignations occurs for both large and small clients.

Keywords: Client Influence, Bargaining Power, Auditor Change, Auditor Independence, Independence Risk

JEL Classification: M42

Suggested Citation

Adams, Thomas and Krishnan, Jagan and Krishnan, Jayanthi, Client Influence and Auditor Independence Revisited: Evidence from Auditor Resignations (July 1, 2017). University of Connecticut School of Business Research Paper No. 17-05; Fox School of Business Research Paper No. 17-033. Available at SSRN: https://ssrn.com/abstract=3024877 or http://dx.doi.org/10.2139/ssrn.3024877

Thomas Adams

University of Connecticut ( email )

School of Business
Storrs, CT 06269-2041
United States

Jagan Krishnan

Temple University - Department of Accounting ( email )

Fox School of Business & Management
1801 Liacorous Walk
Philadelphia, PA 19122
United States
215-204-8126 (Phone)
215-204-5587 (Fax)

Jayanthi Krishnan (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215-204-3085 (Phone)

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