Auditor Independence in Fact Research, Regulatory, and Practice Implication PDF

Accounting Horizons American Accounting Association
Vol. 29, No. 1 DOI: 10.2308/acch-50966

2015
pp. 217–238
COMMENTARY
Auditor Independence in Fact: Research,

Regulatory, and Practice Implications Drawn
from Experimental and Archival Research
Bryan K. Church, J. Gregory Jenkins, Susan A. McCracken,
Pamela B. Roush, and Jonathan D. Stanley
SYNOPSIS: Notwithstanding various safeguards intended to enhance auditor

independence in fact, regulators including the PCAOB have continued to express
concerns that auditors, at times, are failing to maintain an appropriate level of
independence. In this paper, we provide an analysis of selected academic studies
related to auditor independence to offer readers a foundation on which to evaluate the
substantial body of research in the area and to understand the mixed findings
reported in experimental and archival studies. We discuss issues surrounding the
research designs and methods used in prior work, highlighting challenges that face
researchers. Subsequently, we take stock of what we have learned from our analysis
and consider the research, regulatory, and practice implications of our conclusions.
We also offer avenues for future research and highlight specific issues that warrant
further investigation.
Keywords: auditor independence; independence regulation; independence in fact.
Bryan K. Church is a Professor at Georgia Institute of Technology, J. Gregory Jenkins is a

Professor at Virginia Polytechnic Institute and State University, Susan A. McCracken is an
Associate Professor at McMaster University, Pamela B. Roush is an Associate Professor at the
University of Central Florida, and Jonathan D. Stanley is an Associate Professor at Auburn
University.
The authors acknowledge the helpful comments of Arnie Wright, Jeff Cohen, Lori Shefchik, and two anonymous
referees, and also the research assistance of Kathy Enget and John Lauck.
The Auditing Section of the American Accounting Association (AAA) assembled teams to study issues of interest to the
Public Company Accounting Oversight Board (PCAOB). This paper represents the work of the team assembled to study
Auditor Independence. The views expressed in this paper are those of the authors and do not represent the views of the
Auditing Standards Committee of the AAA, the AAA, or the PCAOB.
Submitted: December 2012
Accepted: October 2014
Published Online: October 2014
Corresponding Author: J. Gregory Jenkins
Email: greg.jenkins@vt.edu
217
218 Church, Jenkins, McCracken, Roush, and Stanley
INTRODUCTION
I
ndependence in fact is an undergirding principle of the auditing profession (Previts and Merino
1998) that is considered necessary for high-quality audits (Mautz and Sharaf 1961). The
essence of factual independence encompasses the auditor’s ability and willingness to suppress
bias and to report honestly (e.g., Beattie and Fearnley 2002, 4). Regulators have asserted that
financial scandals and audit failures often occur due to a lack of independence in the performance of
the audit (e.g., European Commission [EC] 2011; International Forum of Independent Audit
Regulators [IFIAR] 2012; Public Company Accounting Oversight Board [PCAOB] 2012a, 2012b,
2012c). Therefore, regulatory bodies such as the Securities and Exchange Commission (SEC) and
the PCAOB have pursued a variety of policies to promote and enhance auditors’ ability to maintain
independence.
A lack of independence can lead to biased judgments, indicating a failure in the audit
process, but such failures do not necessarily reduce the quality of audit outputs (e.g., Church and
Shefchik 2012; Peecher and Solomon 2014). Process failures increase the likelihood that the
quality of audit outputs is lowered; however, this relationship is by no means one-to-one. For
example, the auditor may fail to obtain sufficient appropriate evidence to test management’s
explanation that an increase in gross margin is attributable to a change in sales mix. But if
management’s explanation is correct, the process failure does not impact the quality of audited
financial statements. Of course, repeated process failures eventually may degrade the quality of
audit outputs.
A vast body of research examines auditor independence, and new studies emerge on a regular
basis. The purpose of this paper is to provide an analysis of selected academic studies to enable an
evaluation of research findings and provide greater context to understand regulators’ concerns that
auditors are failing, at times, to maintain their independence (PCAOB 2012b). The framework
presented in Figure 1 guides our analysis of the literature. As depicted, our analysis and discussion
examines (1) experimental research that focuses on auditors’ judgments and decision making
underlying the audit process (i.e., audit planning, the accumulation and evaluation of evidence, and
opinion formulation), and (2) archival research that investigates audit outputs. We point out two
fundamental distinctions between experimental and archival research methods. First, experimental
methods permit manipulation and randomization, which allows the researcher to draw causal
linkages. By comparison, archival methods provide evidence of associations or correlations
between variables of interest. Second, experimental methods emphasize internal validity, whereas
archival methods stress external validity. We are not aware of any paper that has sought to analyze
findings in the auditor independence literature distinguishing between experimental and archival
research.
While prior research provides some consensus regarding the factors and circumstances that
potentially undermine (as well as safeguard) independence, disagreement persists in the literature
as to whether audit quality is compromised (cf. Church and Shefchik 2012; Peecher and Solomon
2014). We suggest that the continuing disagreement is a result of how researchers study
independence breaches. For instance, much experimental research suggests that motivational and
cognitive biases negatively affect the auditors’ judgments and decision making, which may
hinder auditors’ ability to maintain their independence. By comparison, much of the archival
research fails to find evidence of impaired independence vis-à-vis analysis of audit outputs.
Gramling, Jenkins, and Taylor (2010) note that the audit fee/hiring/retention model currently in
use suggests that the auditor can be less than totally independent and still provide a high-quality
audit. In this paper, we assess the underlying differences between the two streams of research and
point out the obstacles and challenges facing researchers under each approach. Table 1 offers a
summary of key research findings reported in selected experimental and archival studies related to
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Auditor Independence in Fact: Research, Regulatory, and Practice Implications 219
FIGURE 1
Framework of Auditor Independence Research Findings
auditor independence. A substantial portion of this paper discusses and analyzes relevant studies
in each area.
Much literature examines auditor independence, including independence in fact and
independence in appearance. These two facets of independence are related, but different constructs
that are influenced by different variables and alternative perspectives and, thus, call for distinctly
different research approaches (e.g., Dopuch, King, and Schwartz 2004; Schneider, Church, and Ely
2006). There is a vast body of literature on independence in appearance; however, we limit our
focus to studies examining factual independence.1 We choose to focus on breaches of independence
in fact because regulatory bodies around the world have expressed concern that compromised
independence (in fact) occurs far too often (e.g., EC 2011; IFIAR 2012; PCAOB 2012a, 2012b,
2102c). Such concerns provide a basis for regulatory intervention. Indeed, the European Union is
going forward with mandatory audit firm rotation. Accordingly, we investigate academic research
that has linkages, albeit sometimes indirect, to auditor independence in fact.2
The remainder of the paper is organized as follows. First, we critically assess how researchers study
auditor independence in fact, considering both experimental and archival methods. Subsequently, we
take stock of what we have learned from our analysis and consider the research, regulatory, and practice
implications of our conclusions. Moreover, we offer avenues for future research and highlight specific
issues that warrant further investigation. Finally, we offer brief concluding remarks.
1
Extant research on auditor independence includes a number of literature reviews and proposed frameworks. For
example, Johnstone, Sutton, and Warfield (2001) discuss how various incentives and factors can interact in unintended
ways to affect independence risk (i.e., the risk that independence is either compromised or perceived to be
compromised) and offer a model for future study in the area. Turner, Mock, and Srivastava (2002) offer an alternative
model to Johnstone et al. (2001) that focuses on intentional (emphasis added) impairment resulting from
knowledgeable actions by the auditor. Beattie and Fearnley (2002) review literature related to the provision of non-
audit services, but limit their review to the period prior to the passage of the Sarbanes-Oxley Act of 2002. Schneider et
al. (2006) present a detailed review of 30 years of literature related to the provision of non-audit services to audit
clients, but do not directly address the experimental versus archival nature of the literature. Finally, Gramling et al.
(2010) review the auditor independence literature with the specific aim to formulate suggestions for policy makers
regarding independence rules for public company auditors. We refer the reader to these papers for additional
discussion of auditor independence issues (including issues surrounding independence in appearance).
2
Insofar as findings reported on independence in appearance differ substantially from those reported in studies discussed
in this paper, we suggest readers exercise a measure of caution in arriving at conclusions regarding policy matters.
Thus, we recognize our focus as a limitation and encourage others to provide an analysis of the experimental versus
archival literature on independence in appearance.
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220
TABLE 1
Summary of Key Findings of Selected Experimental and Archival Research on Auditor Independence in Fact
Focus of Research Selected Related Studies Overall Findings
Experimental Studies Client preferences McDaniel and Kinney 1995; Hackenbrack and Nelson Much evidence suggests that auditors tend to
1996; Salterio and Koonce 1997; Haynes et al. evaluate client-provided information in a manner
1998; Jenkins and Haynes 2003; Kadous et al. 2003; that suggests they are biased to ‘‘approve’’ or
Blay 2005; Earley et al. 2008; Pike et al. 2013 ‘‘confirm’’ the information. In addition, auditors
tend to evaluate evidence in a manner that
supports client preferences when accounting
standards are ambiguous.
Ongoing auditor-client Tan 1995; Favere-Marchesi and Emby 2005; Bamber Much evidence suggests that auditors who are familiar
relationships and Iyer 2007; Rose 2007; Rennie et al. 2010; with a client make judgments that are more aligned
Hatfield et al. 2011 with client preferred outcomes. In addition,
familiarity can lead auditors to place too much
weight on client explanations and representations.
Archival Studies Auditor fees Attributes of financial statements: Reynolds and Francis Much evidence suggests that heightened auditor
2001; Ashbaugh et al. 2003; Chung and Kallapur fees are unrelated to proxies for reduced audit
2003; Raghunandan et al. 2003; Kinney et al. 2004; quality; however, more recent studies suggest that
Larcker and Richardson 2004; Reynolds et al. 2004; audit outputs can be affected negatively.
Agrawal and Chadha 2005; Hunt and Lulseged 2007;
Srinidhi and Gul 2007; Stanley and DeZoort 2007;
Gleason and Mills 2011; Knechel and Sharma 2012;
Causholli et al. 2014
Issuance of going concern opinions: Reynolds and
Francis 2001; DeFond et al. 2002; Geiger and Rama
2003; Hunt and Lulseged 2007; Robinson 2008;
Callaghan et al. 2009; Read 2011
Auditor tenure Attributes of financial statements: Johnson et al. 2002; Much evidence suggests that lengthy auditor tenure
Myers et al. 2003; Carcello and Nagy 2004; Gul et does not adversely impact audit outputs;
al. 2007; Stanley and DeZoort 2007; Davis et al. however, more recent studies suggest that audit
2009; Chu et al. 2013 outputs can be affected negatively.
Issuance of going concern opinions: Geiger and
Raghunandan 2002
Church, Jenkins, McCracken, Roush, and Stanley
March 2015
Accounting Horizons
EXPERIMENTAL RESEARCH ON INDEPENDENCE

We examine experimental research that delves into various aspects of the audit process to shed
light on the PCAOB’s concerns related to auditors’ shortcomings surrounding independence,
objectivity, and professional skepticism. Investigations of independence and the audit process are
challenging because academic researchers rarely are afforded access to detailed firm records that
might allow for a more granular examination of how independence affects the audit process. Even if
one does have access to firm records, it is difficult to determine an auditor’s mental attitude.
Consequently, academic studies have focused on examining biases that are hypothesized to affect
the audit process, thereby leaving researchers to draw indirect inferences about whether
independence is impaired.
As depicted in Figure 1, we consider experimental research that examines biases that may arise
due to (1) the auditor’s tendency to support the client’s preferences and interests and (2) the
auditor’s ongoing relationship with the client. Bazerman, Loewenstein, and Moore (2002, 98–100)
assert that key structural aspects inherent in auditing create opportunities for bias to influence
professional judgment. Specifically, the auditor is hired to endorse or reject the client’s financial
statements, the auditor often assesses the application of ambiguous accounting standards, and the
auditor has clear-cut business reasons to maintain a continuing relationship with the client.
Bazerman et al. (2002) contend that these structural elements provide a basis for cognitive and/or
motivational biases, potentially sacrificing auditor independence.
Client Preferences
Regulators and researchers alike question whether the auditor can remain untainted by the
client’s preferred accounting choices, as the auditor has financial incentives to retain the client
(Carcello, Hermanson, and Huss 2000; Bazerman et al. 2002; Knechel, Niemi, and Zerni 2013).
Researchers are concerned that cognitive biases, such as anchoring and confirmation, affect an
auditor’s ability to remain objective. Indeed, much of the research in this area suggests that auditors
tend to anchor on the client’s suggested method and approach the audit as ‘‘approving’’ or
‘‘confirming’’ the client’s financial statements (e.g., Earley, Hoffman, and Joe 2008). Jenkins and
Haynes (2003) report results consistent with confirmation bias, finding that auditors are more
inclined to support a client’s preferred method when the preference is communicated prior to
evidence evaluation than afterward. Kennedy (1995) asserts that biased judgments arise because
auditors are unable to disregard knowledge of the client’s preference when evaluating evidence.
Client-provided information can influence auditors’ judgments (e.g., assessing the plausibility of
account balances), potentially eroding auditor independence (e.g., McDaniel and Kinney 1995;
Pike, Curtis, and Chui 2013). By comparison, other findings suggest that auditor experience, to
some extent, can dampen the negative effects of judgmental biases on auditor behavior (e.g.,
Kaplan and Reckers 1989; Moreno and Bhattacharjee 2003). We caution, however, that contextual
factors such as the close relationships between auditors and their clients and the subjective nature of
much accounting (cf. Bazerman et al. 2002) potentially undercut the benefits of auditor experience
(see e.g., Bonner 2008, 315).
Auditors also are subject to self-serving biases, and the ambiguities inherent in many
accounting standards allow auditors to selectively gather and evaluate evidence to reach a preferred
conclusion (Blay 2005). Past research shows that auditors tend to gather and evaluate evidence in a
selective manner to support client preferences via the exploitation of ambiguities in accounting
standards (Hackenbrack and Nelson 1996; Salterio and Koonce 1997; Haynes, Jenkins, and Nutt
1998; Kadous, Kennedy, and Peecher 2003). The knowledge of client preferences provides auditors
with directional goals that motivate them to both interpret standards and evaluate evidence to
support that goal (Hackenbrack and Nelson 1996; Haynes et al. 1998). Stronger directional goals
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(Kadous et al. 2003) and more ambiguous standards (Salterio and Koonce 1997) typically have a
greater influence on an auditor’s ability to support client preferences.
Ongoing Auditor-Client Relationships

Research suggests that the development of a relationship with a client can lead to excessive
familiarity and, in turn, complacency (Tan 1995). Biases may arise as an auditor’s familiarity with a
client increases, making it difficult for the auditor to maintain the appropriate level of independence
over time (Beckett Ference 2013). Prior research finds that auditors who are familiar with a client
make judgments that are more aligned with client preferences (Tan 1995; Favere-Marchesi and
Emby 2005; Hatfield, Jackson, and Vandervelde 2011). Bamber and Iyer (2007) report that long-
standing associations between auditors and clients may cause auditors to more closely identify with
their clients and, thus, more readily accept client explanations and preferences, calling into question
an auditor’s ability to remain independent over the course of a long-term professional relationship.
Other experimental research suggests that familiarity can lead to excessive trust such that the
auditor puts too much weight on the client’s explanations and representations. Rose (2007) finds
that trusting auditors are less likely to attend to evidence of aggressive reporting and the possibility
of a material misstatement than other auditors. This effect would, quite naturally, magnify over
time. Along these lines, Rennie, Kopp, and Lemon (2010) show that trust becomes stronger as the
auditor-client relationship lengthens. And while trust is necessary for an audit to be feasible
(Richard 2006; Rennie et al. 2010), too much trust can weaken professional skepticism and,
ultimately, auditor independence (Shaub 1996).
Negotiations represent another significant dimension of the auditor-client relationship.
Previous research suggests that the two parties have different sources of influence and power in
negotiations. For example, when disagreements arise the client typically sets the stage for what the
outcome will be and, in many situations, holds the power in determining the outcome (McCracken,
Salterio, and Gibbins 2008). Brown-Liburd and Wright (2011) find that relationships characterized
by positive interactions, including compromises by auditors on past client matters, have a key
impact on future negotiations, leading to less conservative audit judgments. Not surprisingly, client-
retention concerns can have a significant, negative influence on auditors’ negotiation strategies
(Hatfield, Agoglia, and Sanchez 2008). Notwithstanding, Wang and Tuttle (2009) study auditor-
client negotiation strategies under different regulatory systems and find that auditor-participants are
less supportive of client preferences when rotation is mandated. Stricter accounting standards also
appear to aid auditors’ positions by constraining clients’ negotiating leverage (Ng and Tan 2003).
Discussion of Experimental Studies

Our examination of specific experimental research related to auditor independence leads to the
following conclusions. The structure of the audit setting naturally creates an environment in which
cognitive and motivational biases can influence auditor judgments, making it difficult for auditors to
remain completely unbiased, and indirectly casting doubt on auditors’ ability to maintain their
independence (Bazerman et al. 2002). Notwithstanding, independence is difficult to observe during
an audit.3 Even regulators find it taxing to determine what ‘‘being independent’’ during an audit
entails, so they often turn to examples of compromised independence identified during inspections
3
Through its inspection process, the PCAOB has access to audit files, audit team members, and firm policies that it
evaluates to determine whether the auditor has performed either a sufficient or deficient audit. While their inspections
suggest that auditors, at times, do not exercise the appropriate level of independence, objectivity, and professional
skepticism (PCAOB 2011), the PCAOB also cautions that they cannot definitively identify the root cause of observed
deficiencies (PCAOB 2011, 6).
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(e.g., overreliance on management representations, failure to exercise appropriate judgments in

auditing fair values and management estimates, and establishing materiality and audit scope) when
discussing auditor independence and providing oversight (PCAOB 2011). Researchers also face
these and other challenges when investigating whether auditors systematically compromise their
independence during an audit.
As summarized in Table 1, prior experimental studies provide evidence that auditors anchor on
client preferences when gathering and evaluating evidence (Earley et al. 2008) and become more
attached to their clients over time (Tan 1995; Bamber and Iyer 2007). It is well known, however,
that mechanisms exist to de-bias judgments, potentially calling into question the impact of these
inherent biases on the financial statements and audit opinion, two of the outputs of an audit. Nelson
(2006) argues that incentives exist within the audit context to counteract biases inherent to auditing
(see also Johnstone et al. 2001). For instance, supervision and review are key factors in the audit
process that make auditors accountable for their judgments and decisions and potentially promote
objectivity, but often are excluded from experimental research designs.4 Inclusion of such factors in
future studies may clarify or expand our understanding of existing theories by capturing more ‘‘real
world’’ factors and has the potential to lead researchers to findings that are different from those
reported in the extant literature. Furthermore, auditors face countervailing economic (e.g., potential
lawsuits and regulatory sanctions) and social pressures (e.g., professional ethics requirements and
reputational forces) that can offset biases, such that the appropriate outputs result. Bazerman,
Moore, Tetlock, and Tanlu (2006) continue to question Nelson’s (2006) claims of the effectiveness
of these incentives by arguing that while the incentives promote auditor integrity, the audit setting
results in auditors having unconscious biases to benefit their firms, their clients, and themselves. So,
even if auditors believe they are making unbiased decisions, they are unconsciously interpreting the
evidence through a biased lens (Bazerman et al. 2006).
Prior research investigates specific aspects of an engagement that can be influenced by
conscious or unconscious biases in an experimental setting. For example, Hatfield et al. (2011)
study client pressure, which underlies directional goals and motivational biases, by varying how the
auditor-client relationship is characterized. In the high- (low-) pressure condition, the client is
described as one of the auditor’s largest (smallest) clients, accounting for 25 (2) percent of the
auditor’s time. The study finds that auditors who face high client pressure propose lower audit
adjustments than auditors who face low client pressure, indicating that auditors continue to be
influenced by clients, supporting Bazerman et al. (2006).
Experimental settings, though, often are abstract and stylized, giving readers caution when
extrapolating findings to naturally occurring settings. Nonetheless, researchers investigate variables
of interest to extend our knowledge of underlying theories. For instance, Kadous et al. (2003) study
the joint effects of auditors’ commitment to directional goals, ambiguity of accounting standards,
and auditors’ quality assessments of an accounting method (serving as a benchmark to determine
whether an accounting choice is acceptable) on auditors’ willingness to comply with client
preferences. The study is noteworthy because regulators contend that quality assessment is a
potential means to de-bias auditors’ judgments: that is, the audit process includes a factor that is
supposed to improve auditor objectivity. Yet, the experimental results indicate that quality
assessment does not dampen auditors’ bias, but rather amplifies it, with the findings supporting
4
Numerous studies have investigated the review process; however, a discussion of this literature is beyond the scope of
the current paper. Nonetheless, it is instructive to know that researchers have examined a wide range of issues affecting
the review process including the implications of workpaper stylization to address reviewers’ preferences (Tan and
Shankar 2010), review format (Agoglia, Hatfield, and Brazel 2009), client and preparer risk factors (Asare, Haynes,
and Jenkins 2007), specialized reviews (Bamber and Ramsay 2000), identification of different error types (Harding
and Trotman 1999), and sensitivity to information source objectivity (Reimers and Fennema 1999).
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theoretical arguments attributable to motivated reasoning. Research along these lines has very real
and important practical implications.
ARCHIVAL RESEARCH ON INDEPENDENCE

A significant body of archival research has examined the association between auditor
independence and audit outputs. This research most often is based on selected audit outputs such as
publicly observable attributes of audited financial statements or audit opinions (e.g., discretionary
accrual measures, financial misstatements, going-concern opinions, and adverse internal-control
opinions). Archival studies that focus on audit outputs probe whether a test variable, designed to
assess the degree to which an auditor is potentially independent of a client, is associated with
attributes of audited financial statements or audit opinions. Numerous test variables have been
examined (e.g., audit fees, non-audit service [NAS] fees, client size, corporate governance
mechanisms, litigation risk, regulatory regime, and auditor tenure), and independence has been
scrutinized at various levels (e.g., overall audit firm, local practice office, and engagement).
In considering prior archival research and as shown in Figure 1, we restrict our attention to
specific studies that investigate (1) fees paid to the auditor and (2) the length of the auditor-client
relationship. We focus on these areas because they are linked to research covered in the preceding
section on experimental research. Fees paid to the auditor provide a measure of client importance,
which may be associated with directional goals to endorse client preferences. Accordingly, this line
of study is driven by auditors’ motivational biases, with the purpose of determining whether audit
outputs potentially are affected by such biases. Auditor tenure, on the other hand, encompasses the
ongoing relationship between an auditor and client, including familiarity and trust, which may lead
to motivational and/or cognitive biases. This area of study aims to provide insights into whether the
potential downside of lengthy tenure (e.g., complacency and excessive trust) outweighs the
potential upside (e.g., in-depth client-specific knowledge), judging the net effect on audit outputs
through archival methods.
Auditor Fees
Fees paid to the auditor provide an economic incentive for the auditor to accept a client’s
accounting choices, potentially undermining independence and leading to an expected negative
relationship between fees and clients’ financial reporting quality (e.g., Frankel, Johnson, and Nelson
2002). Using fee data that became available following the initial round of mandated fee disclosures
in 2001, Frankel et al. (2002) provide evidence of a positive (negative) relationship between NAS
(audit) fees and the magnitude of discretionary accruals as well as small earnings surprises. These
results suggest that as NAS fees increase, auditors are more lenient with respect to earnings
management. However, several subsequent archival studies do not support this finding.
Ashbaugh, LaFond, and Mayhew (2003) also examine clients’ discretionary accruals and
propensity to meet earnings thresholds. The authors find no systematic evidence that NAS fees are
associated with clients’ financial reporting quality in a way that indicates impaired independence.
Other studies yield similar results (e.g., Reynolds, Deis, and Francis 2004; Larcker and Richardson
2004), even after limiting test samples to engagements where the auditor is expected to face the
greatest incentives to compromise independence (e.g., Chung and Kallapur 2003). Still other
archival studies use financial restatements, rather than clients’ discretionary accruals, as a proxy for
financial reporting quality. Evidence based on client restatements generally parallels that based on
discretionary accruals and fails to provide evidence that higher fees are associated with reduced
financial reporting quality (e.g., Raghunandan, Read, and Whisenant 2003; Agrawal and Chadha
2005; Kinney, Palmrose, and Scholz 2004; Stanley and DeZoort 2007). Collectively, the findings
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do not support the argument that motivational biases (e.g., directional goals and self-serving biases)
negatively impact attributes of audited financial statements.5
Three recent studies, on the other hand, suggest that NAS fees are inversely associated with
financial statement quality (i.e., Srinidhi and Gul 2007; Markelevich and Rosner 2013; Causholli,
Chambers, and Payne 2014). These studies attempt to use more refined measures to gain insight
into the association between auditor fees and financial reporting quality. For example, Srinidhi and
Gul (2007) take into account accruals quality (see Dechow and Dichev 2002), which allows for the
possibility that heightened accruals are not necessarily reflective of opportunistic earnings
management. Markelevich and Rosner (2013) examine a sample of firms sanctioned by the SEC for
fraudulent reporting between 2000 and 2010, providing a basis to compare fraud and non-fraud
firms. Last, Causholli et al. (2014) recognize that an auditor’s opportunity to sell additional NAS to
an audit client in future years can impact the auditor’s current level of independence. All three
studies provide evidence that suggests NAS fees are negatively associated with financial reporting
quality.
Archival studies of the U.S. audit market typically have failed to link auditor fees (directly or
indirectly, including NAS fees) to the issuance of going-concern opinions, particularly in a way that
suggests impaired independence (e.g., Reynolds and Francis 2001; DeFond, Raghunandan, and
Subramanyam 2002; Geiger and Rama 2003; Hunt and Lulseged 2007; Robinson 2008; Callaghan,
Parkash, and Singhal 2009; Read 2011). Two recent studies, however, provide evidence that is
consistent with fees negatively impacting the auditor’s reporting decision. Similar to Causholli et al.
(2014), Blay and Geiger (2013) conjecture that the auditor’s reporting decision is potentially
affected by client retention efforts and, in turn, future fees. The study’s findings indicate that
current NAS fees and future total fees are inversely associated with the issuance of a first-time,
going-concern opinion. Rice and Weber (2012) study firms that misstated financial statements
between 2004 and 2009 because of weaknesses in internal control over financial reporting. The
authors find that NAS fees paid to the auditor during the misstatement period are inversely related
to the likelihood of issuing an adverse internal control report. This result suggests that incentives to
receive NAS fees, potentially creating directional goals, play a role in whether the auditor publicly
discloses internal control problems.
In sum, as noted in Table 1 many archival studies fail to document a systematic relationship
between auditor fees and audit outputs; however, more recent evidence suggests otherwise. Recent
studies (Rice and Weber 2012; Markelevich and Rosner 2013) seek to overcome challenges
gauging audit quality by honing in on unique samples. Similarly, Causholli et al. (2014) and Blay
and Geiger (2013) underscore the importance of properly defining auditor fees (i.e., current versus
future fees) to capture economic incentives facing the auditor, potentially impacting audit outputs.
Auditor Tenure
As summarized in Table 1, a large number of archival studies fail to link lengthy auditor-client
relationships with reduced financial reporting quality (e.g., Johnson, Khurana, and Reynolds 2002;
J. Myers, L. Myers, and Omer 2003; Carcello and Nagy 2004; Gul, Jaggi, and Krishnan 2007;
Stanley and DeZoort 2007). Johnson et al. (2002) provide some of the first empirical evidence on
the subject using a large sample of Big 6 engagements spanning a ten-year period. The authors
divide their sample into three tenure groups, short (two or three years), medium (four to eight
5
We highlight that, to the extent that impaired independence is more a function of the client’s discretion over hiring/
firing the auditor than the relative magnitude of fees (e.g., Healy and Palepu 2003), the auditor’s independence is
potentially impaired by economic incentives in a way that is not detectible by studies that examine the incremental
effect of auditor fees on audit outputs.
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years), and long (nine or more years) and examine differences across the groups in discretionary
accrual levels and accrual persistence. The authors fail to find that accruals differ between medium-
and long-tenure groups. Instead, they find that short-tenure engagements have lower quality
financial reports than medium-tenure engagements. This finding suggests that an audit firm’s
incentive to receive future revenue streams from a client and/or a lack of client-specific knowledge
in the early years of an audit adversely affect the quality of the client’s financial reports (cf. Blay
and Geiger 2013). Myers et al. (2003) and Gul et al. (2007) provide similar evidence also using
various accrual measures, while Carcello and Nagy (2004) and Stanley and DeZoort (2007) provide
similar evidence using cases of fraudulent reporting and financial restatements, respectively.
As we note in Table 1, more recent archival studies have begun to find evidence that the
relationship between auditor tenure and audited financial statements is more complex than
previously modeled and that lengthy tenure, in some cases, may indeed erode auditors’
independence. For example, Davis, Soo, and Trompeter (2009) study auditor tenure and the use
of discretionary accruals to meet or beat analyst forecasts, in which case the client is incentivized to
manipulate accruals (i.e., to manage earnings upward). The authors stress that their more restricted
research design can provide a more powerful empirical test of audit quality than a design that more
broadly looks at the unconditional magnitude of discretionary accruals—as used in several earlier
studies (e.g., Johnson et al. 2002; Myers et al. 2003; Gul et al. 2007). Based on their approach,
Davis et al. (2009) provide evidence that empirical results are sensitive to time period and the
specific cutoff used to determine long tenure. Similar to prior studies, the authors find that short
tenure is associated with reduced financial reporting quality. However, they also find that long
tenure is associated with reduced financial reporting quality when long tenure is defined as 15 years
or greater. Moreover, this long-tenure effect disappears during the post-SOX period of 2002–2006.
Chu, Church, and Zhang (2013) reach a similar conclusion, focusing specifically on accruals that
underlie the allowance for bad debts.
Extant U.S. evidence on the relationship between auditor tenure and the likelihood of issuing a
modified opinion is limited to Geiger and Raghunandan (2002). The authors fail to document that
lengthy auditor tenure (defined as six or more years) is associated with a decreased likelihood of
issuing a going-concern opinion. However, the issuance of a going-concern opinion is an extreme
decision, which typically garners more attention than other audit reporting decisions (e.g., Mutchler
1985). In turn, the decision context may override the negative aspects of long tenure (i.e.,
complacency and excessive trust), dampening directional goals and motivational and/or cognitive
biases.
Discussion of Archival Studies

Our review of specific archival research on auditor independence and audit outputs leads to the
following conclusions. Research findings suggest that fee-based incentives and lengthy auditor
tenure do not necessarily jeopardize auditors’ independence in a way that adversely affects audit
outputs. Nonetheless, the failure of most studies to document an adverse independence effect
cannot completely dismiss concerns about auditors’ economic and social incentives. Archival
studies often are limited by data constraints and research design. With respect to the dependent
variables commonly used, studies based on attributes of both audited financial statements and audit
opinions are subject to limitations. Audited financial statements are influenced by judgments and
decisions made by both client management and the auditor (Antle and Nalebuff 1991).
Disentangling client effects from auditor effects is a challenging task, especially for studies based
solely on publicly available data. Further, recent studies that provide support for independence
concerns (e.g., Davis et al. 2009; Markelevich and Rosner 2013) call attention to the importance of
statistical power of tests.
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March 2015
Because audit opinions are the sole responsibility of the auditor, research based on whether
fees or tenure influence the auditor’s decision to issue a going-concern opinion or adverse internal
control opinion is less prone to the problem that results are influenced by client management.
However, these audit opinions pose their own unique issues. For example, going-concern opinions
generally are only an issue for distressed clients (Reynolds and Francis 2001; DeFond et al. 2002),
which introduce additional business risk to the auditor (Johnstone 2000). This added business risk
may mitigate any incentive the auditor has to jeopardize independence. Therefore, a lack of
evidence that fees or tenure impact the likelihood of an auditor issuing a going-concern opinion to a
financially distressed client may not generalize to a larger population of audit engagements that
poses less business risk to the auditor. Similar to issues surrounding independence research based
on attributes of audited financial statements, a lack of findings also could be explained by a lack of
statistical power. Blay and Geiger (2013) emphasize the need to restrict analyses to severely
distressed client firms for which the going-concern decision is most salient to the auditor. Rice and
Weber (2012) call similar attention to such issues and emphasize that their uniquely focused
research design (i.e., firms that restated their financial statements because of weaknesses in internal
control over financial reporting) has several advantages. However, the authors caution their results
may not generalize to client firms with less severe problems that do not warrant a restatement of
prior financial reports.
In an attempt to understand the basic relationship between auditor independence and audit
outputs, many archival studies focus primarily on tests designed to detect linear, monotonic
relationships. However, the possibility exists that the structural relationship between the test
variables and audit outputs is more complex than allowed by such designs. For example, Larcker
and Richardson (2004) show that the relationship between auditor fees and clients’ discretionary
accruals is complex and conditioned on various factors, including the strength of the clients’
corporate governance. By moving beyond a relatively simple model between fees and clients’
reported earnings, the authors allow for the possibility that multiple models may better describe fee-
based effects on audit outputs. Similarly, the auditor tenure literature has begun to explore statistical
models that place fewer restrictions on the relationship between audit outputs and the length of
auditor-client relationships. Using a quadratic model that allows for non-linearity without restricting
tenure thresholds to arbitrary cutoffs, Davis et al. (2009) and Brooks, Cheng, and Reichelt (2012)
provide evidence that financial reporting quality is increasing in auditor tenure for a period of time,
after which it is decreasing in auditor tenure. These studies suggest that this inverted-U shaped
relationship varies with time and other factors (e.g., auditor size and industry specialization).
Furthermore, regulatory intervention such as that which accompanied the passage of the Sarbanes-
Oxley Act can affect the nature of the relationship (Davis et al. 2009; Brooks et al. 2012).
Finally, independence impairments may manifest at a level not examined previously. For
instance, prior work has tested for (and generally not found evidence of ) adverse fee effects in the
U.S. audit market at the firm, local office, and engagement levels. Due to the non-public nature of
partner identities in the U.S., little attention has been directed at audit partners, who likely have a
substantial impact on audit outputs.6 In a recent study using Swedish data, Knechel et al. (2013)
focus on individual partners’ financial well-being and find that auditors are less likely to issue a
going-concern report when the client is more economically important to the individual partner’s
compensation. Also, with respect to auditor tenure concerns, very little attention has been directed
at the relationship between audit partner tenure and audit outputs in the U.S. Using proprietary data
6
In December 2013, the PCAOB re-proposed a standard requiring the disclosure of the name of the engagement partner
for the most recent audit along with the names of other public accounting firms or individuals not employed by the
auditor who performed audit procedures along with the percentage of hours attributable to the audit procedures in
relation to the total audit hours the other auditor performed (PCAOB 2013a).
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March 2015
from 90 audit engagements completed between 1999 and 2001, Manry, Mock, and Turner (2008)
find some evidence suggesting a positive relationship between partner tenure (with a client) and
financial reporting quality (proxied by discretionary accruals). However, this relationship is isolated
to small clients and partner tenure of greater than seven years. Litt, Sharma, Simpson, and Tanyi
(2014) use audit firm change events and the SOX-mandated five-year partner rotation rule to infer
partner rotation events in the U.S. Based on their analysis of discretionary accruals and going-
concern opinions, the authors provide evidence suggesting that audit quality declines immediately
following a partner change. Findings from international studies examining partner tenure and audit
quality are inconsistent and vary by country (see Litt et al. [2014] for a discussion). Furthermore,
the applicability of the international findings to the U.S. is unclear because the business and legal
environments differ markedly.
PRACTICE AND POLICY IMPLICATIONS AND SUGGESTIONS FOR FUTURE

RESEARCH
In this paper, we explore specific experimental and archival research relevant to the effects of
independence on (1) auditors’ judgments and decisions that underlie the audit process and (2)
observable audit outputs. Our examination of experimental studies suggests that cognitive and
motivational biases have the potential to impair independence and, consequently, weaken the audit
process. By comparison, our examination of archival studies fails to definitively link test variables
(i.e., auditor fees and lengthy auditor tenure) with evidence of compromised independence. Taken
as a whole, the findings suggest that, although judgmental biases may hinder the audit process, such
biases do not necessarily degrade audit outputs. The PCAOB routinely documents deficiencies in
the audit process, which may be attributable to judgmental biases, but such deficiencies typically do
not manifest as failures in audit outputs. Indeed, the vast majority of audit deficiencies identified in
the PCAOB’s inspection reports do not lead to a material misstatement of financial statements
(Hermanson, Houston, and Rice 2007; Church and Shefchik 2012). Nonetheless, the PCAOB’s
continued concerns are not unreasonable in light of the significant practical implications that may
result from such audit deficiencies. According to the Public Broadcasting System (PBS),
stockholders saw share value tumble an estimated $200 billion in total from more than 700 financial
statement restatements in the 1990s (PBS 2002). The research to date provides a critical step toward
understanding how auditor independence is ultimately related to the integrity of financial
information released into the marketplace. Building on this work, we suggest several areas for
consideration by the profession and policy makers, which also provide avenues for future study by
academics (refer to Table 2). For each area, we offer a number of specific research questions, which
may further our knowledge of independence issues.
The first area of proposed future study is to examine and extend evidence that suggests, under
certain conditions, auditor independence might be compromised due to the influence of biases.
Future research can shed light on the robustness of judgmental biases in the audit process and,
furthermore, identify boundary conditions that delineate when such biases might undercut auditor
independence and, in turn, compromise audit quality. Audit firm policies and quality control
procedures include various mechanisms aimed at promoting independence, such as periodic internal
independence confirmations by firm professionals, audit review processes (i.e., supervision and
review of subordinates’ work, engagement quality control reviews, internal inspection processes),
decision aids, required consultation, and other risk management practices (Johnstone et al. 2001). It
is important to consider whether such mechanisms are incorporated in research designs and, if not,
whether inclusion potentially alters findings reported in the extant literature. Additionally, from a
public practice perspective, this research could then shed light on which mechanisms should be
employed by auditors to promote auditor independence, and in turn, improve audit quality.
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March 2015
TABLE 2
Summary of Practice and Policy Issues and Related Research Questions
Practice and Policy Issue—Biases
A body of evidence suggests that cognitive and motivational biases affect auditors’ judgments and
decisions, potentially undermining independence during the audit process. Other evidence, however,
suggests that these biases typically do not manifest in a way that negatively affects audit outputs.
Importantly, audit firm policies and quality control procedures include various mechanisms that are
designed to counteract the adverse effects of judgmental biases. Are audit firm policies and quality
control procedures, in conjunction with PCAOB inspections, sufficient to ensure auditor independence
and promote audit quality? What benchmarks should be used (by the audit profession and the
PCAOB) in evaluating the success of efforts to promote auditor independence and audit quality? In
other words, is it possible to measure professional and regulatory success as it relates to auditor
independence and audit quality?
Research Questions
1a. Would the inclusion of specific mechanisms in research designs alter the findings of prior studies
that provide evidence that is suggestive of impaired independence?
1b. Which quality control mechanisms and key audit quality metrics should regulators and audit firms
employ to promote auditor independence, and in turn, improve audit quality? When should these
mechanisms or audit quality metrics be used?
1c. What is the role of client characteristics, particularly best practices in corporate governance, in
safeguarding auditor independence?
1d. Do audit firms actively consider particular corporate governance attributes during client acceptance/
continuance that specifically relate to safeguarding auditor independence?
1e. Would more refined archival methods and measurements lead to the conclusion that independence
impairments within the audit process are associated with lower quality audit outputs?
Practice and Policy Issue—Compensation
Audit partners’ compensation plans can be tied to partners’ individual client portfolios, office-level
client portfolios, or to firm-wide plans. Prior research suggests that partners in firms with locally
based compensation plans, as opposed to firm-wide plans, are more sensitive to economic
incentives and, in turn, are at greater risk of compromising independence. The audit environment,
however, has changed dramatically over the past decade, and the PCAOB now considers partners’
compensation/evaluation in its inspection process. What is the role of partners’ compensation plans
in today’s environment? Do specific components of partner compensation arrangements undermine
auditor independence, to the point of detracting from audit quality? Should the PCAOB require
firms to publicly disclose details of partners’ compensation and evaluation systems (e.g., local
versus regional profit pools)? Would such disclosures be meaningful to various stakeholders in
assessing auditor independence?
Research Questions
2a. What impact has the PCAOB’s inspection process had on partners’ compensation plans or
performance evaluations in the U.S., and how has the makeup of compensation plans changed over
time?
2b. Does partner compensation/evaluation differ across firms or offices of the same firm and, if so, how?
If differences exist, then do auditor independence issues manifest differently across firms in a
predictable manner?
2c. How do partner compensation/evaluation systems and legal regimes interact to affect partner
behavior and, in turn, auditor independence?
2d. What is the impact of different means to compensate/evaluate partners (identified in today’s
environment) on the audit process and audit outputs, including implications for auditor
independence?
(continued on next page)
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March 2015
TABLE 2 (continued)
Practice and Policy Issue—Quality Control and Reputational Capital
While audit firm policies and quality control procedures ensure compliance with professional standards,
they should also protect auditors’ reputational capital. Yet, surprisingly little is known about how
firms’ quality control systems change over time and whether such systems are associated with
reputation formation. What is the role of quality control systems in safeguarding auditor independence
and, ultimately, protecting auditors’ reputational capital? The PCAOB examines elements of a firm’s
quality control during its inspection process and releases observations about quality control
deficiencies if they are not remediated by a firm within one year. Would audit market decision makers
benefit from the PCAOB’s disclosure of quality control deficiencies in firms’ inspection reports even
when such deficiencies are remediated in a timely manner? For those firms whose previously private
portion of the inspection report is released, do audit market decision makers draw negative inferences
about a firm’s audit quality? Should the PCAOB consider the market’s reaction to the release of such
reports?
Research Questions
3a. How do firms’ quality control systems develop and evolve over time?
3b. What is the linkage between quality control systems, maintaining auditor independence, and
reputation formation?
3c. Does the PCAOB’s disclosure of quality control criticisms (for firms that fail to remediate such
criticisms) offer evidence of independence problems, which in turn undermine firms’ reputational
capital?
3d. Do quality control systems, including design, implementation, and operation, differ across firms or
offices of the same firm and, if so, how?
3e. How do different legal regimes influence auditor independence?
Moreover, studies could work to identify when these mechanisms should be employed (e.g., during
training of audit professionals, prior to client acceptance, or during engagement quality review).
We particularly encourage researchers to explore specific mechanisms that are critical in
benefitting and promoting auditor independence. For example, our analysis of specific archival
research related to the attributes of financial statements indicates that most studies fail to find that
paying large fees (including NAS fees) to auditors in the U.S. audit market adversely impacts
clients’ financial reporting quality. Thus, we urge researchers to isolate mechanisms that insulate
partners from the potentially negative effects of strong economic incentives. Simply put, how do
firms prevent particular auditor-client relationships from hindering independence?
We note that the PCAOB (2013b) recently initiated a project on the creation and use of audit
quality indicators, including various means to gauge firm independence. The PCAOB (2013c, 8)
suggests that a host of metrics can be tracked and disclosed, such as the number and nature of SEC
independence violations, the average number of mandatory independence training hours per
employee, and the number of audit clients lost due to independence violations, among others. We
implore researchers to link these metrics to specific features of firms’ quality control policies and
procedures as a means to benefit audit practice. Once the key metrics have been identified, audit
firms and regulators will be better able to assess independence issues and identify potential causes
of impaired independence. The overall goal would be to promote best practices in the design and
implementation of quality control systems.
We also call for research to identify client characteristics that promote auditor independence,
most notably attributes of companies’ corporate governance. Recent regulatory changes, including
stock exchange listing requirements and the Sarbanes-Oxley Act (U.S. House of Representatives
2002), aim to strengthen corporate governance; however, these changes likely reduce the cross-
sectional variation in observable governance attributes, such as board and audit committee member
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March 2015
independence and financial expertise (Carcello, Hermanson, and Ye 2011). With companies’
governance mechanisms becoming more and more similar, researchers need to dig deeper to discern
specific aspects that bolster auditor independence. Carcello et al. (2011, 14–16) suggest that
researchers have begun to examine critical issues associated with audit committees, including
committee members’ compensation, the nature, process, and substance of committee meetings, and
committee members’ judgments and decisions. For example, Beasley, Carcello, Hermanson, and
Neal (2009) conduct semi-structured interviews of audit committee members and find evidence of
meaningful monitoring activities as well as ceremonial activities. Additional research along these
lines is certainly merited. We believe it is important to identify best practices, bringing to the
forefront practical means to bolster auditor independence and uphold audit quality, specifically
through effective corporate governance and oversight. We encourage researchers and regulators to
work together to identify relevant benchmarks that provide evidence of laudable corporate
monitoring activities. Audit practice would benefit from the identification and adoption of such
benchmarks, as a way to appraise companies’ corporate governance and oversight, which could aid
in evaluating prospective clients and planning engagements. Another avenue of potential
importance in the governance arena is research that investigates the influence of social and
professional ties between audit committee members and CEOs. A recent study by Bruynseels and
Cardinaels (2014) finds that social ties have potentially negative effects on audit committee
oversight as evidenced by the committee purchasing fewer audit services and audit firms being less
likely to issue going-concern opinions or to report internal-control weaknesses.
Given the divergent findings across experimental and archival studies, we recommend further
investigation of the general lack of evidence suggesting that impaired independence adversely
impacts audit outputs. We think this issue is particularly important in light of ongoing PCAOB
inspection findings that suggest a lack of independence. One possibility is that the mechanisms in
place to maintain audit quality successfully prevent inherent biases from ultimately impacting audit
outputs. However, the extent to which these mechanisms promote and protect independence on an
ongoing basis (across settings) is debatable. For example, prior findings suggest that workpaper
stylization impacts the effectiveness of the review process (e.g., Wilks 2002; Tan and Trotman
2003). Likewise, Brazel, Agoglia, and Hatfield (2004) provide evidence that the manner in which
reviews are conducted (i.e., face-to-face versus electronically) influences the quality of auditors’
judgments. The possibility also exists that the lack of archival research findings that suggest
impaired independence is due to inadequate research designs and construct measurements. Recent
studies in this area highlight this possibility and the need for more careful consideration of these
issues (e.g., Blay and Geiger 2013; Markelevich and Rosner 2013). Future research can shed
additional light on whether refinements to archival methods used to study audit outputs lead to
findings that are more consistent with findings from studies on the audit process.
The second area of proposed future study relates generally to the economic relationship
between the client and auditor and specifically to partner compensation. Archival research
conducted in audit markets outside of the U.S. suggests that client economic importance can impact
audit outputs. For example, Ferguson, Seow, and Young (2004) document a positive association
between NAS fees and restatements in the U.K. Knechel et al. (2013) find that auditors are less
likely to issue a going-concern opinion to clients that are significant for individual partners’
compensation using data from Sweden. The applicability of these findings to the U.S., though, is
uncertain because the auditor’s legal exposure is substantially higher in the U.S. than in the U.K. or
Sweden. Hence, we encourage researchers and regulators alike to scrutinize countries’ legal regimes
to fully gauge the effect on auditors’ independence. In addition, we urge researchers to consider the
relative impact of a country’s legal regime versus firm specific policies and quality control
procedures in upholding auditor independence. A laboratory approach might prove particularly
useful for investigating these issues, as a handful of experimental economics studies have examined
Accounting Horizons
March 2015
the effect of legal regime on auditor-participants’ behavior (e.g., Dopuch and King 1992; King and
Schwartz 2000; Yu 2011). Findings from these studies have the potential to inform regulators as to
the relative importance of legal regime versus audit firms’ quality control policies in upholding
auditor independence.
Compensation plans tied to individual partners’ client portfolios or to office-level client
portfolios are a critical component in understanding client economic importance (e.g., Burrows and
Black 1998). The PCAOB considers aspects of partner evaluation/compensation in its inspection
process, as part of its review of firms’ quality control. The PCAOB asserts that it considers the
relative weight that firms give to marketing (e.g., client development activities) as compared to
audit quality and technical competence in establishing partner compensation in its evaluation of the
firm (PCAOB 2006, 5). We encourage the PCAOB to consider whether disclosures related to
partner compensation would be instructive to investors and audit market decision makers. Along
these lines, the PCAOB (2013b, A2–21) suggests that assessing the linkages between firms’
average partner compensation, the relative emphasis placed on technical competence and fortitude
in performance evaluation, and observable audit quality metrics may promote audit quality.
Carcello et al. (2000) provide evidence that partners in firms with locally based compensation
plans, as opposed to firm-wide plans, are more sensitive to client economic importance in making
going-concern decisions (similar to the findings of Knechel et al. [2013]). However, Carcello et
al.’s data are from 1987 to 1991, and firm/office compensation practices likely have changed over
time (cf. Dirsmith, Fischer, and Samuel 2005). Additional study is needed to discern how the nature
of partner compensation plans influences auditor independence in the current U.S. marketplace,
particularly given the PCAOB’s inspection regime and oversight activities. Are there particular
components of compensation that have an inordinate influence on auditor independence? We
encourage researchers to investigate partner compensation plans across accounting firms in today’s
environment. If sufficient variation is observed between firms, then researchers can examine how
the audit process and audit outputs are affected by partner compensation plans and/or quality
control policies. Trompeter (1994) addressed this issue many years ago via interviews, but the
profession has changed greatly since his study. The findings from this line of research could have
significant influence on how audit firms compensate their partners and staff.
The third and final area of proposed future research relates to understanding how audit firm
policies and quality control procedures protect auditors’ reputational capital. The consideration of
quality controls in firm inspections indicates that the PCAOB believes these systems are critical to a
firm’s ability to fulfill its professional obligations. It is reasonable to conclude that the PCAOB’s
release of findings related to quality controls are at least to some degree expected to inform various
stakeholders about the quality of a firm (e.g., Lennox and Pittman 2010). We encourage researchers
to investigate the extent to which non-remediated quality control criticisms provide evidence of
independence problems. Such evidence certainly would be disconcerting, as independence is a
foundational element of auditing, and may have broad implications for the oversight of firms that
supply audit services. The audit profession is best served by firms promptly addressing quality
control criticisms, especially criticisms that deal with auditor independence.
The PCAOB’s website includes a complete list of all firms that have failed to satisfactorily
address quality control criticisms identified during the Board’s inspection process. A review of the
PCAOB’s list also reveals firms of varying sizes, including each of the Big 4. Moreover, a number
of firms appear on the list more than once, sometimes for consecutive years. We encourage
researchers to explore whether reputational costs are associated with the release of this information,
particularly if the information points to weaknesses that entail auditor independence. If there are
costs associated with the release of such information, then do the costs differ across firms? If there
is no discernible effect, then what does this mean for the value of releasing the information to the
Accounting Horizons
March 2015
public? Further, how do firms communicate quality control criticisms with current and prospective
clients, particularly those involving independence?
Surprisingly little is known about how firms’ quality control systems change over time and
whether such systems are associated with reputation formation (cf. Bedard, Deis, Curtis, and
Jenkins 2008). One means of shedding light on these issues is to conduct field studies. Longitudinal
studies, in particular, can offer insight into the development and evolution of quality control
systems, honing in on organizational factors that promote auditor independence. Studies comparing
large and small audit firms can address linkages between quality control systems and reputation
formation, the presumption being that the quality control of large firms is better developed than that
of small firms (e.g., DeAngelo 1981). Furthermore, studies comparing quality control systems in
different locations of the same international firm can prove useful because auditor reputation
extends across geographical boundaries (e.g., Cahan, Emmanuel, and Sun 2009). Audit practice
benefits to the extent that quality control systems are maintained at a high level across member
firms in various countries.
CONCLUDING REMARKS
In this paper we offer a critical analysis of selected academic studies related to auditor
independence. We undertake this analysis to more clearly understand mixed findings reported in
experimental and archival studies of independence. Our analysis suggests that a holistic synthesis of
the independence literature requires one to carefully consider methodological choices underlying a
given study. Such an understanding is necessary to appreciate the context and meaning of the
reported findings in relation to the greater body of literature and ongoing concerns of regulators.
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Accounting Horizons American Accounting Association

Vol. 29, No. 1 DOI: 10.2308/acch-50966

Auditor Independence in Fact: Research,

SYNOPSIS: Notwithstanding various safeguards intended to enhance auditor

Bryan K. Church is a Professor at Georgia Institute of Technology, J. Gregory Jenkins is a

EXPERIMENTAL RESEARCH ON INDEPENDENCE

Ongoing Auditor-Client Relationships

Discussion of Experimental Studies

(e.g., overreliance on management representations, failure to exercise appropriate judgments in

ARCHIVAL RESEARCH ON INDEPENDENCE

Discussion of Archival Studies

PRACTICE AND POLICY IMPLICATIONS AND SUGGESTIONS FOR FUTURE

(continued on next page)

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