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As a consequence of the global financial and economic crisis, the European Commission recently reformed the audit market. One objective was to restore public trust in the auditing profession and thus to enhance the audit function. This study investigates whether perceptions of auditor independence and audit quality are influenced by audit firm rotation, auditor retention and joint audits, because regulators argue that these instruments can improve auditor independence and audit quality. Therefore, we conduct an experiment with bank directors and institutional investors in Germany. The results indicate a negative main effect for joint audits on perceived auditor independence, and that a rotation cycle of 24 years marginally significantly impairs participant perceptions of audit quality, compared to a rotation cycle of only ten years. Besides the main effects, planned contrast tests suggest a negative interaction between rotation and joint audit on participant perceptions of auditor independence. Moreover, a negative interaction effect is revealed between rotation after 24 years and retention on perceptions of audit quality. It is particularly noteworthy that we failed to identify a positive impact of the regulatory measures taken or supported by the European Commission on perceptions of auditor independence and audit quality.

The purpose of this paper is to examine whether client industry importance affects auditor independence.

This study analyzes audit firm merger data from China Stock Market and Accounting Research and uses a difference-in-difference model to find whether client industry importance is associated with auditor independence. This study uses discretionary accruals and propensity to issue modified audit opinions as proxies for auditor independence.

Results show that the greater the decline in client industry importance, the more significant the increase in auditor independence. In addition, the magnitude of decline in client overall importance is also positively associated with the extent of increase in auditor independence; however, this result disappears after controlling for client industry importance.

The authors acknowledge that this study has limitations. First, audit firm mergers provide a unique research setting. However, the findings of this study in such setting may not be generalizable to other situations. Second, this study has a limited sample size because of data availability, which could impact the robustness of the results.

Results from this study are important because investors and regulators have increasing concerns over auditor independence since the Enron scandal. To the best of the authors’ knowledge, this study is the first to examine the impact of client industry importance on auditor independence and in a unique setting of audit firm merger to separate auditor independence from auditor competence, and hence controlling for self-selection bias. Results of this study provide evidence that client industry importance has significant influence over auditor independence.

PurposeAuditor independence is fundamental to public confidence in financial reporting and the auditing profession. The study aims to provide further understanding of the factors influencing auditor independence from the perspective of commercial loan officers. Loan officers formed the sample as they are relatively sophisticated financial statement users who would understand the importance of audit report and the issues related to auditor independence.Design/methodology/approachThe study examines the perceptions of commercial loan officers in Malaysian‐owned commercial banks and a total of 86 officers responded to the self‐administered questionnaire.FindingsResults indicate that smaller audit firms, audit firms operating in a higher level of competitive environments, audit firms serving a given client over a longer duration, larger size of audit fees, audit firms providing managerial advisory services, and, the non‐existence of an audit committee, are perceived as having a higher risk of losing independence. Audit firm size appears to be the most important factor that affects the auditor independence, followed by tenure, competition, audit committee, audit firms providing managerial advisory services and size of audit fee.Originality/valueThe paper provides important insights into the factors affecting auditor independence and contributes towards better understanding on the ways to improve the confidence in financial reporting and credibility of the auditing profession.

Mandatory auditor firm rotation (mandatory rotation) has been a controversial issue in the United States for many decades. Mandatory rotation has been considered at various times as a means of improving auditor independence. For example, in the United States, the Public Company Accounting Oversight Board (PCAOB) has considered mandatory rotation as a solution to the independence problem (PCAOB, 2011) and the European Parliament approved legislation that will require mandatory rotation in the near future (Council of European Union, 2014). The concept of implementing a mandatory rotation policy has been encouraged by some constituents of audited financial statements and rejected by other constituents of audited financial statements. Although there are apparent pros and cons of such a policy, the developmental process of such a policy in this country has not necessarily been an open-democratic, objective process. Universal mandatory rotation may or may not be the ideal solution; however, an open-democratic, objective process is needed to facilitate the development of a solution that considers the needs of all major stakeholders of audited financial statements – not simply accounting firms and public companies, but also investors. The purpose of this paper is to critically examine key issues relating to mandatory rotation and to encourage and stimulate future research and ongoing dialogue regarding this issue, in spite of efforts by certain constituents to silence the issue. This paper provides an overview of the various reasons, including practical, theoretical, political, and self-motivated reasons, why a mandatory rotation policy has not been implemented in the United States in order to address the potential conflict of interest between the auditor and client. This paper will also discuss how some deliberations of mandatory rotation have been flawed. The paper concludes with a summary of key issues along with two approaches for regulators, policy makers, and academics to consider as ways to improve the process and address auditor independence. The authors are not advocating for any specific solution; however, we are advocating for a more objective, unified approach and for the dialogue regarding auditor rotation to continue.

Practising internal and external auditors regularly find that crucial concepts governing how they operate are the twin terms of independence and objectivity. Part of the problem is that the two terms are often equated. The impact can be conflict with the auditee, misunderstanding with other stakeholders, impairment of efficiency and effectiveness, and role conflict within the internal audit department. The Institute of Internal Auditors is reviewing some of the cherished notions of internal audit in the light of pressures and developments in the business environment. It has already produced a new definition of internal auditing, which, as before, includes the terms independence and objectivity. Consistently, it decided to re‐evaluate these two terms, and established an international research team. This was the briefing submission from the UK, which was highly influential in determining the final product, not yet in the public domain. It considers professional statements and standards, research and developments in both internal and external auditing.

This experimental study investigates the connotative (measured) meaning of the concept “auditor independence” within three audit engagement case contexts, including two acknowledged in the literature to represent significant potential threats to independence. The study’s research design utilises the measurement of meaning (semantic differential) framework originally proposed by Osgood et al. (1957). Findings indicate that research participants considered the concept of independence within a two factor cognitive structure comprising “emphasis” and “variability” dimensions. Participants’ connotations of independence varied along both these dimensions in response to the alternative experimental case scenarios. In addition, participants’ perceptions of the auditor’s independence in the three cases were systematically associated with the identified connotative meaning dimensions.

Examines the role of professional associations, governmental agencies, and international accounting and auditing bodies in promulgating standards to foster auditor independence domestically and abroad. Focuses specifically on the role played by the American Institute of Certified Public Accountants, the Institute of Internal Auditors (IIA), the Securities and Exchange Commission and the US Government Accounting Office. Also looks at other professional associations in banking, industry, and manufacturing sectors dealing with sensitive issues of auditors′ involvement in such matters as management advisory services, operating responsibilities, outsourcing, opinion shopping, auditor rotation, and other conflicts of interest which may impair auditor independence.

The growing international legal agenda and the fast development of corporate governance rules are now prompting firms to put emphasis on anti-corruption procedures. On the other hand, wide-ranging concerns have been raised by regulators and policymakers regarding the effectiveness of audit committees in promoting ethical behavior and safeguarding auditor independence from the adverse consequences of purchasing non-audit services. The purpose of this paper is to examine the relationship between the adoption of anti-corruption measures and perceived auditor independence in the context of audit committees.

After conducting the Breusch–Pagan Lagrange Multiplier test and the Hausman test, the random-effect model is used as the most appropriate estimator. Several endogeneity tests are also used to account for the endogenous nature of the corporate governance variables in the models.

Using a sample of UK FTSE 350 firms, this paper provides evidence that anti-corruption efforts are associated with lower purchases of non-audit services and lower economic bonding between auditors and their clients. Furthermore, the findings of this paper reveal that the adoption of anti-corruption efforts substitutes the role of audit committees in enhancing perceived auditor independence and that audit committees do not play a significant incremental role.

To the best of the author’s knowledge, this is the first study of its kind to focus on bolstering perceived auditor independence while enhancing the control and ethical environment from the clients’ side instead of the auditors’ side.

The purpose of this study is to investigate the interaction effect of auditor industry specialization and board governance on earnings management. This study examines whether board independence is more or less effective in constraining earnings management for firms audited by industry specialists than for firms audited by non‐specialists.

The US data were collected from the RiskMetrics Directors database and the Compustat database. Regression analysis was used to test the research proposition.

It was found that earnings management is more negatively associated with board independence for firms audited by industry specialists than for firms audited by non‐specialists, consistent with the notion that there is a complementary relationship between auditor industry specialization and board governance. The findings suggest a positive interaction effect of auditor industry specialization and board governance on accounting quality.

This study contributes to the literature by documenting explicit evidence that high quality boards can be more effective through hiring industry specialist auditors. This study also suggests that it may be worth investigating the interaction effect among different corporate governance mechanisms on accounting quality.