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Article: Consulting revenue sharing, auditor effort and independence, and the regulation of auditor compensation
Title | Consulting revenue sharing, auditor effort and independence, and the regulation of auditor compensation |
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Authors | |
Issue Date | 2012 |
Publisher | Elsevier Inc. The Journal's web site is located at http://www.elsevier.com/locate/jaccpubpol |
Citation | Journal of Accounting and Public Policy, 2012, v. 31 n. 2, p. 139-160 How to Cite? |
Abstract | The joint provision of audit and non-audit services by audit firms to their audit clients has posed a threat to auditor independence. To mitigate the independence problem, the US Securities and Exchange Commission (SEC) issued a regulation (. SEC, 2003) that prohibits audit partners from receiving compensation for the sale of non-audit services to their audit clients. This study examines the effects of this regulatory change on the effort and reporting decisions of audit partners. We show that partners in an audit firm strategically change the firm's liability-sharing rule. As a consequence, the regulation restores truthful reporting but has an undesirable negative effect on audit effort. The effect of the regulation on the welfare of the economy (defined as the total payoff to both audit firms and their clients) hinges on the tradeoff between the benefit of the regulation, which is derived from the inducement of truthful reporting, and the cost of the regulation, which results from less diligent audit work. We show that the regulation is more likely to increase the welfare in a strong legal regime (where the legal liability cost of auditor litigation is high) than in a weak legal regime. © 2011 Elsevier Inc. |
Persistent Identifier | http://hdl.handle.net/10722/139838 |
ISSN | 2023 Impact Factor: 3.3 2023 SCImago Journal Rankings: 1.327 |
ISI Accession Number ID | |
References |
DC Field | Value | Language |
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dc.contributor.author | Liu, X | en_HK |
dc.contributor.author | Chan, DK | en_HK |
dc.date.accessioned | 2011-09-23T05:57:28Z | - |
dc.date.available | 2011-09-23T05:57:28Z | - |
dc.date.issued | 2012 | en_HK |
dc.identifier.citation | Journal of Accounting and Public Policy, 2012, v. 31 n. 2, p. 139-160 | en_HK |
dc.identifier.issn | 0278-4254 | en_HK |
dc.identifier.uri | http://hdl.handle.net/10722/139838 | - |
dc.description.abstract | The joint provision of audit and non-audit services by audit firms to their audit clients has posed a threat to auditor independence. To mitigate the independence problem, the US Securities and Exchange Commission (SEC) issued a regulation (. SEC, 2003) that prohibits audit partners from receiving compensation for the sale of non-audit services to their audit clients. This study examines the effects of this regulatory change on the effort and reporting decisions of audit partners. We show that partners in an audit firm strategically change the firm's liability-sharing rule. As a consequence, the regulation restores truthful reporting but has an undesirable negative effect on audit effort. The effect of the regulation on the welfare of the economy (defined as the total payoff to both audit firms and their clients) hinges on the tradeoff between the benefit of the regulation, which is derived from the inducement of truthful reporting, and the cost of the regulation, which results from less diligent audit work. We show that the regulation is more likely to increase the welfare in a strong legal regime (where the legal liability cost of auditor litigation is high) than in a weak legal regime. © 2011 Elsevier Inc. | en_HK |
dc.language | eng | en_US |
dc.publisher | Elsevier Inc. The Journal's web site is located at http://www.elsevier.com/locate/jaccpubpol | en_HK |
dc.relation.ispartof | Journal of Accounting and Public Policy | en_HK |
dc.rights | NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Accounting and Public Policy. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Accounting and Public Policy, 2012, v. 31 n. 2, p. 139-160. DOI: 10.1016/j.jaccpubpol.2011.10.001 | - |
dc.rights | This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License. | - |
dc.title | Consulting revenue sharing, auditor effort and independence, and the regulation of auditor compensation | en_HK |
dc.type | Article | en_HK |
dc.identifier.email | Liu, X: acliu@hku.hk | en_HK |
dc.identifier.email | Chan, DK: dkchan@hkucc.hku.hk | en_HK |
dc.identifier.authority | Liu, X=rp01079 | en_HK |
dc.identifier.authority | Chan, DK=rp01046 | en_HK |
dc.description.nature | postprint | - |
dc.identifier.doi | 10.1016/j.jaccpubpol.2011.10.001 | en_HK |
dc.identifier.scopus | eid_2-s2.0-84862827733 | en_HK |
dc.identifier.hkuros | 194804 | en_US |
dc.relation.references | http://www.scopus.com/mlt/select.url?eid=2-s2.0-84862827733&selection=ref&src=s&origin=recordpage | en_HK |
dc.identifier.volume | 31 | en_HK |
dc.identifier.issue | 2 | en_HK |
dc.identifier.spage | 139 | en_HK |
dc.identifier.epage | 160 | en_HK |
dc.identifier.eissn | 1873-2070 | - |
dc.identifier.isi | WOS:000303227300001 | - |
dc.publisher.place | United States | en_HK |
dc.identifier.scopusauthorid | Liu, X=8409667100 | en_HK |
dc.identifier.scopusauthorid | Chan, DK=7402216890 | en_HK |
dc.identifier.citeulike | 10507056 | - |
dc.identifier.issnl | 0278-4254 | - |