Client Consequences of Auditor Independence Violations: Evidence from SEC Sanctions against PwC

52 Pages Posted: 2 Dec 2020 Last revised: 27 Nov 2023

See all articles by Russell Barber

Russell Barber

University of Colorado Denver

Carol Callaway Dee

University of Colorado Denver

Katherine Gunny

University of Colorado at Denver

Multiple version iconThere are 2 versions of this paper

Date Written: November 17, 2023

Abstract

In 2019, the audit firm PwC was sanctioned by the U.S. Securities and Exchange Commission (SEC) for violating auditor independence rules for providing prohibited non-audit services (NAS) to audit clients. We use this setting to examine whether violation of auditor independence rules is associated with a reduction in perceived or actual audit quality. The sanctions against PwC provide a rare opportunity to explore whether lack of auditor independence reduces investors’ confidence in the audited financial statements. We find that PwC independence rule violations are associated with a reduction in perceived audit quality and the reduction is concentrated in clients with high abnormal audit fees and weak audit committees, suggesting investors are reacting to PwC independence violations and not just firm-wide reputation concerns. We also find actual audit quality improves from the violation period to the post-violation period. Overall, we provide evidence that independence rule violations impair audit quality, and that rules in the Sarbanes-Oxley Act of 2002 prohibiting certain NAS are valued by investors.

Keywords: PCAOB, auditor independence, audit quality, non-audit service

Suggested Citation

Barber, Russell and Dee, Carol Callaway and Gunny, Katherine, Client Consequences of Auditor Independence Violations: Evidence from SEC Sanctions against PwC (November 17, 2023). Available at SSRN: https://ssrn.com/abstract=3711803 or http://dx.doi.org/10.2139/ssrn.3711803

Russell Barber

University of Colorado Denver ( email )

United States

Carol Callaway Dee

University of Colorado Denver ( email )

1475 Lawrence St.
Campus Box 165, PO Box 173364
Denver, CO 80217-3364
United States

Katherine Gunny (Contact Author)

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

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