Auditor independence and non-audit services - ICAEW

CHAPTER 7IMPACT OF JOINT PROVISION AND JOINT PROVISION DISCLOSURESON AUDITOR INDEPENDENCE PERCEPTIONS AND DECISIONS:SURVEY AND EXPERIMENTAL STUDIES7.1 IntroductionThere exists a large body of empirical evidence concerning the impact of variouseconomic and regulatory factors on the perception of auditor independence. This is fortwo reasons. First, actual auditor independence is extremely difficult to observe, and sothe focus of research effort has been on perceptions. Second, perceptions are ofimportance in their own right. One of the key variables investigated in such studies isjoint NAS provision. Research design issues are discussed in section 7.2, while thefindings from such studies (grouped by country) are presented in section 7.3.However, a significant number of studies examine the behaviour or decisions associatedwith these perceptions (in some cases in addition to an investigation of auditorindependence perceptions). For example, bank loan officers are asked whether (and onwhat terms) they would grant loans to the client company. In a few cases, the decisionsof auditors (rather than users) are investigated and this research design is a way ofassessing actual auditor independence. This group of studies is reviewed in section 7.4.Empirical studies have generally involved mail surveys, either questionnaires or selfadministeredexperiments.There are two opposing views regarding the impact of joint NAS provision on auditorindependence. The first (arguably more common) view is that the economic bond(economic dependence) is increased and the relationship becomes too close, adverselyimpacting auditor independence. The alternative view is that the auditor’s knowledgeof the client company is enhanced, and that such knowledge spillovers increaseobjectivity and independence (Goldman and Barlev, 1974; Wallman 1996).A much smaller body of studies explore the impact of NAS disclosures about theprovision of NAS on perceptions of auditor independence. These appear in section7.5.7.2 Research design issuesMost studies either focus exclusively on actual or proposed ethical rules or investigate avery limited number of key generic threat factors (such as audit fee dependence;competition within the audit market; the joint provision of NAS; and the degree of laxityof the regulatory framework). In the former case, the questionnaires present a list offactors to be assessed individually. In the latter case, a limited number of factors arecombined in ‘case studies’ with a repeated-measures, fixed effects experimentaldesign 11 , allowing investigation of interaction effects. The underlying model being testedhas a measure of auditor independence perceptions as the dependent variable and the11 In this experimental design, subjects are repeatedly asked about the same factors, each set at severaldifferent levels. A repeated measures design is also called a ‘within-subjects’ design, to be contrastedwith a ‘between-subjects’ design. The lack of repetition in the latter is desirable to reduce thepossibility of ‘demand effects’, where the subjects guess the purpose of the study and respond as theythink the researcher wants. Unfortunately, a between-subjects design requires the participation of manymore subjects.34