Economic Dependence and Reputation Concern for the Audit Firm, Audit Groups, and Individual Auditors — The Case of Taiwan

Using a sample of 3,274 firm-year data from an internationally renowned accounting firm, we investigate the effects of auditor–client relationship on auditor quality (measured by absolute discretionary accruals (ABSDA)) from the perspectives of audit firm, audit group, and individual auditor, respectively. Our empirical results show that after taking account of the client size effect, the client's fee contribution to audit firm and to audit group is positively related to the client firm's ABSDA. The finding that audit firms and audit groups allow their important clients a higher level of ABSDA supports the economic-dependence hypothesis. Moreover, the economic dependence effect is more saliently found prior to the enactment of 2002 Sarbanes–Oxley Act. Furthermore, the other finding that senior individual auditors require their clients a lower level of ABSDA holds the reputation-concern hypothesis. A synopsis of the overall findings indicates that the argument of economic dependence prevails in the analysis of the audit firm and audit group, while the reputation concern prevails in the analysis of the individual auditor.