Three Studies of Auditor Independence

This dissertation investigates auditor independence by examining the effects of various factors on independence, both in fact and as perceived by several distinct groups. The first study examines the effects of auditing students cognitive moral development and client risk on students judgments related to an audit partners acquiescence to client pressure in an earnings management scenario. The results indicate that students with higher levels of moral reasoning evaluated earnings management as less ethical and were also less likely to accept earnings management by an audit client. The results also indicate that subjects in a high client risk scenario evaluated earnings management as less ethical and were also less likely to accept earnings management by an audit client. Furthermore, this study investigated whether client risk moderates the effect of cognitive moral reasoning on ethical judgments and behavioral intentions. The results do not indicate an interaction.The second and third studies deal with potential consequences associated with the perceived impairment of auditor independence. Specifically, the second study deals with the effects of auditor-provided non-audit services on the client companys bond rating. If financial statement users believe that auditors providing non-audit services impairs the auditors independence, they are likely to recognize an increase in information risk associated with such impairment (Johnstone et al. 2001). This could occur regardless of the true nature of the auditors independence and would suggest a negative relationship between the amount of non-audit services purchased from the companys auditor and the companys bond rating. The results of this study support that contention.The third study investigates the effects of client importance and audit firm size on juror evaluations of auditor liability and damage awards. Previous research in accounting shows that client importance can affect sophisticated financial statement users perceptions of auditor independence. However, no study has investigated perceptions of auditor independence in a litigation context. The results indicate that when an auditor is involved in litigation associated with an audit client that is financially more important to the auditor, jurors evaluations of negligence are higher and they assess more in punitive damages. No effect of audit firm size on negligence ratings or damage awards is found.