Research Presentation by Dr. Morina Rennie

Fri., Apr. 5, 2013 10:30 a.m.

Location: Education Building, Room 558

Auditor independence and the auditor-client relationship: An exploratory field study

Paper by Morina Rennie (University of Regina), Lori Kopp (University of Lethbridge) & W. Morley Lemon (University of Waterloo)

Presented by Dr. Morina Rennie

Abstract:

The auditor's role in society is to add reliability and credibility to financial statements. Investors and creditors rely on auditors to ensure that financial statement information can be trusted. The auditor's independence is essential to performing this role, and professional standards require the auditor to be both independent in mind and independent in appearance. However, the structure of the auditor-client relationship is perceived to be a potential barrier to auditors asserting their independence--companies have the ability to dismiss their auditor if they so choose. The auditor may pay a heavy price for pushing too hard for what is right. Thus, an implicit presumption underlying much of the auditor independence literature is that strongly asserting one's independence is at odds with sustaining the auditor-client relationship. In this exploratory study we use a variant of the critical incident technique to look more closely at the issue in the context of auditor-client management disagreements as recalled by experienced auditors.

In this study, we contrast two types of outcomes of an auditor-client disagreement: (a) The substantive outcome, which we define as whether the auditor made any concession at all, and (b) The relationship outcome--the impact of the disagreement on the auditor-client relationship. The study seeks to provide evidence concerning five research questions relevant to these outcomes and factors that may influence them:

RQ1: Is there an association between auditors making no concessions at all in auditor-client disagreements and the impact of the disagreement on the auditor-client relationship?

RQ2: Is the use of power by client representatives to pressure auditors during auditor-client disagreements associated with substantive outcomes and/or relationship outcomes?

RQ3: Is tenure of auditor-client relationships associated with substantive outcomes and/or relationship outcomes of auditor-client disagreements?

RQ4: Is the importance of the issue causing auditor-client disagreements associated with substantive outcomes and/or relationship outcomes?

RQ5: Is auditor experience associated with substantive outcomes and/or relationship outcomes of auditor-client disagreements?