Client influence and auditor independence revisited: Evidence from auditor resignations

• Published in: Journal of accounting and public policy Vol. 40; no. 5; p. 106846
• Main Authors: Adams, Tom, Krishnan, Jagan, Krishnan, Jayanthi
• Format: Journal Article
• Language: English
• Published: New York Elsevier Inc 01.09.2021; Elsevier Sequoia S.A
• Subjects: Accountant independence; AICPA; Audit quality; Auditor change; Auditor independence; Auditors; Audits; Bargaining power; Client influence; Clients; Financial statements; Independence; Independence risk; Litigation; PCAOB; Resignations; Risk; Risk factors; Scandals; SEC; SEC; Auditor independence; Client influence; Bargaining power; PCAOB; Auditor change; AICPA; Independence risk
• ISSN: 0278-4254; 1873-2070
• DOI: 10.1016/j.jaccpubpol.2021.106846

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.