Economic Importance of the Client: When Do Shareholders Care about Auditor Independence?

• In Event: Auditor and Audit Committee Independence

Abstract

This study examines whether and when shareholders have a negative perception of an auditor's economic dependence on the client. The results from a Big 4-client sample in the U.S. (2010 to 2014) indicate a negative association between the economic importance of the client - measured at the audit office-level - and shareholders' perceptions of external financial reporting quality - measured by the earnings response coefficient and ex ante cost of equity capital. We interpret these results as shareholders' concerns about auditor independence. We also find that shareholders primarily regard independence due to client dependence as a problem for firms that are more likely to be financially distressed. Thus, this study provides evidence that client circumstances condition shareholders' perceptions of auditor independence.

Authors

• Sven Hoerner, Julius-Maximilians-Universitaet Wuerzburg

• Jacob Justus Leidner, University of Würzburg