The Impact of Economic Bonding on Audit Quality: Evidence from Audit Working Papers

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

Abstract

In this study we examine the effect of audit effort and economic bonding on audit quality. Based on credence goods theory, we challenge the frequently assumed direct link between costs and audit quality (Ball et al, 2012). We predict and find that high effort audit engagements are associated with a higher probability of detecting audit differences than low effort audit engagements. Simultaneously, we observe that economic bonding lowers the quality achieved by high effort: our results suggest that auditors facing high independence threats are associated with overstated earnings. We do not find negative or positive effects of non-audit services on audit quality. Consequently, our results suggest that the negative effects of economic bonding are part of the audit practice itself, i.e. economic bonding threats are a result of the auditors’ business case and how the auditor economically survives in competitive markets. We base our results on working papers from 681 audit engagements with 2,209 firm-year observations over the period 2006 to 2011.

Authors

• Joost P. van Buuren, Nyenrode Business Universiteit

• Barbara Majoor, Nyenrode Business University

• Leen Paape, Nyenrode Business University

• Arnold Wright, Northeastern University