Political Contributions and the Auditor-Client Relationship

• In Event: Economic Bonding, Client Size, and Non-audit Fees
  In Paper Session: Economic Bonding, Client Size, and Non-Audit Fees

Abstract

We examine how an audit client’s political contributions influence the auditor-client relationship. Prior research suggests opposing forces from political contributions on the auditor’s assessment of audit risk. Prior research also suggests political contributions can increase a firm’s social prestige and influence, which we conjecture can increase the client’s bargaining power and influence with the auditor. we provide evidence that higher political contributions are associated with higher audit fees, a lower likelihood of a material weakness, a lower likelihood of an auditor switch, poorer accruals quality, and higher nonaudit fees than non-connected clients. Higher audit fees suggest greater audit risk, while longer audit tenure, poorer accruals quality, and higher nonaudit fees suggest a stronger auditor-client economic bond. The combination of higher audit risk, stronger auditor-client economic bond, and fewer reported material weaknesses is most consistent with the notion that clients use their political clout and social prestige to weaken auditor independence.

Authors

• Dana Marie Wallace, University of Central Florida

• Frank Heflin, The Florida State University