The Influence of Client Importance and Country-Level Institutions on Auditor Behavior

• In Event: Client Importance and Nonaudit Fees

Abstract

This study investigates how client importance and country-level institutions affect auditor behavior and is motivated by the introduction of fee dependence laws in countries outside the US. While auditors form a strong economic bond with their important clients, these clients also pose greater risk through both higher litigation costs and reputation loss. Using a hand-collected dataset of foreign firms, I find that Big 4 auditors increase (decrease) the quality of earnings for more important clients when investor protection is higher (lower). Furthermore, increases in both public and private enforcement levels are able to attenuate this relationship in countries with lower investor protection. Lastly, other country-level institutions including culture, disclosure laws, and press freedom further affect this relationship.

Author

• Matthew James Beck, Michigan State University