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Audit fee effects on auditor independence
Abstract
Auditor independence provides investors confidence in audited financial statements. Any threat to audit independence may undermine this confidence. Because unpaid audit fees may threaten independence, this study examines the effect of audit fees on audit independence. One hundred forty-three individuals attending continuing education classes for Certified Public Accountants served as subjects for this study. Subjects responded to three scenarios in which they must decide whether to disclose a threatening situation concerning their client's ability to continue in existence. A disclosure may jeopardize eventual collection of unpaid audit fees. Prospect theory, framing, escalating commitment, motivated reasoning, and social indebtedness theory literatures form theoretical bases for predictions of auditors' choices. In the first scenario, subjects were asked whether or not they would require disclosure of certain information in the notes to the financial statements. Although more subjects given a loss frame than a gain frame risked not requiring disclosure, as was hypothesized, the results were not statistically significant. Several studies provide evidence consistent with these non-significant results, suggesting escalating commitment is sensitive to the subjects' frames of reference, risk attitudes, experience, and other factors. In the second scenario, subjects indicated whether or not they would continue the engagement with the client. In the loss condition, audit fee non-collectors escalated as hypothesized; however, audit fee collectors de-escalated. Neither result was significant in the hypothesized direction; however, a significant interaction occurred between groups. This result is consistent with several studies which observe that inexperienced individuals escalate more than experienced individuals. In the third scenario, subjects were asked to assess the reliability of several sources of evidence. Significant escalation did not occur as hypothesized in the loss condition. Choices made by gain condition subjects in the second scenario were compared to a lottery choice. Subjects tended to escalate more with the client relationship than with the lottery choice; however, results were not statistically significant.
Subject Area
Accounting
Recommended Citation
Bailey, James Alma, "Audit fee effects on auditor independence" (1992). ETD collection for University of Nebraska-Lincoln. AAI9308164.
https://digitalcommons.unl.edu/dissertations/AAI9308164