Title

Client influence and auditor independence revisited: Evidence from auditor resignations

Document Type

Article

Publication Date

10-18-2021

Abstract

Financial scandals such as the Enron-Andersen debacle provoke concerns that auditors lack independence when faced with influential clients. Unlike previous studies that examine whether client influence affects audit quality on ongoing engagements (providing mixed results), we investigate whether client influence (which engenders “independence risk”) at the audit-office level affects auditor resignations from high engagement-risk clients. We construct summary measures of engagement risk, using client disclosures on Form 8-K filings, potential risk factors (e.g., litigation risk), and auditor action (e.g., issuance of a going concern opinion) on the previous year’s financial statements. Focusing on risky clients, we find that auditors are more likely on average to resign from influential clients, and this positive association holds for auditors that are less likely to have mechanisms in place to mitigate independence risk. Also, importantly, influential clients are prevalent across the spectrum of client size, and the positive association between client influence and auditor resignations holds for both large and small clients.

Language

English

DOI

https://doi.org/10.1016/j.jaccpubpol.2021.106846

Comments

This article is the authors' final published version in Journal of Accounting and Public Policy, Volume 40, Issue 5, October 2021, Article number 106846.

The published version is available at https://doi.org/10.1016/j.jaccpubpol.2021.106846. Copyright © Elsevier Inc.

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