Study: Auditor Independence Erodes When Audit Committee Members Serve on Multiple Boards With Same Auditor

By:
Chris Gaetano
Published Date:
Dec 21, 2016
Partnerships

A recent study in the journal Auditing: A Journal of Practice and Theory 
says that when someone serves as an audit committee member on multiple boards, audit quality and independence can be diminished if they all use the same audit firm and are assigned the same audit partner. So imagine someone who serves as an audit committee member on the board of both Company ABC and Company XYZ. Then imagine that Company ABC and Company XYZ both use the same audit firm and are assigned the same audit engagement partner. When this happens, according to the study, the audit tends to be of lower quality and the auditor tends to be less independent.

One reason for this, according to the study's abstract, is that the audit partner, recognizing the same audit committee member from one company to another, may "perceive that future fee income from the network of interlocked companies may be affected by disputes with the management of an interlocked client company," according to the study's abstract. 

The study looked at fees generated from clients with this networked relationship on its audit board, and compared this to the likelihood of issuing a first-time going concern modified audit report and the absolute value of discretionary accruals. 

"Regressions on unrestricted and propensity score matched samples provide consistent evidence that audit partner dependence on fees from other companies in the network reduce audit quality," said the abstract. 

A statement from one of the researchers, cited in Accounting Today, said that this supports the idea that there should be a way to identify audit engagement partners, as the Public Company Accounting Oversight Board will begin requiring in January through its new Form AP. 

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