THE ACCOUNTING REVIEW Vol. 85, No. 2 2010 pp. 573–605
American Accounting Association DOI: 10.2308 / accr.2010.85.2.573
Auditor Independence in a Private Firm and Low Litigation Risk Setting
Ole-Kristian Hope University of Toronto John Christian Langli Norwegian School of Management (BI)
ABSTRACT: We examine the issue of auditor independence in a unique setting. Speciﬁcally, we test for auditor independence impairment among (1) private client ﬁrms, for which the risk of auditor reputation loss is lower than for publicly traded ﬁrms, and (2) in a low litigation environment (i.e., Norway) that further reduces the expected costs to the auditor associated with independence impairment. We have thus chosen a setting that gives independence impairment its best chance of being detected if it exists. Using a large sample of private Norwegian ﬁrms, we analyze whether auditors who receive higher fees are less likely to issue modiﬁed opinions. Despite the low litigation risk and the reduced reputation risk, our empirical results provide no evidence that auditors compromise their independence through fee dependence. These results are robust to controlling for the expected portion of fees, to different sample speciﬁcations, to the use of both levels and changes speciﬁcations, and to a number of sensitivity analyses. Keywords: auditing; auditor independence; private ﬁrms; litigation risk; reputation; accounting; professional ethics. Data Availability: The data used in this study are publicly available from the sources described.
We have received valuable comments from Steven Kachelmeier (senior editor), Wayne Thomas, Shuping Chen (FEA discussant), Mark Clatworthy, Mohammad Abdolmohammadi, Len Brooks, Jeff Coulton, Aasmund Eilifsen, Xiaohua Fang, Jere Francis, Bror Petter Gulden, Kevan Jensen, Erlend Kvaal, Alastair Lawrence, Lasse Niemi, two anonymous reviewers, and workshop participants at the Norwegian School of Economics and Business Administration (NHH), the...