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Article: Consulting revenue sharing, auditor effort and independence, and the regulation of auditor compensation

TitleConsulting revenue sharing, auditor effort and independence, and the regulation of auditor compensation
Authors
Issue Date2012
PublisherElsevier 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?
AbstractThe 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 Identifierhttp://hdl.handle.net/10722/139838
ISSN
2015 Impact Factor: 1.317
2015 SCImago Journal Rankings: 1.030
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorLiu, Xen_HK
dc.contributor.authorChan, DKen_HK
dc.date.accessioned2011-09-23T05:57:28Z-
dc.date.available2011-09-23T05:57:28Z-
dc.date.issued2012en_HK
dc.identifier.citationJournal of Accounting and Public Policy, 2012, v. 31 n. 2, p. 139-160en_HK
dc.identifier.issn0278-4254en_HK
dc.identifier.urihttp://hdl.handle.net/10722/139838-
dc.description.abstractThe 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.languageengen_US
dc.publisherElsevier Inc. The Journal's web site is located at http://www.elsevier.com/locate/jaccpubpolen_HK
dc.relation.ispartofJournal of Accounting and Public Policyen_HK
dc.rightsNOTICE: 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.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.titleConsulting revenue sharing, auditor effort and independence, and the regulation of auditor compensationen_HK
dc.typeArticleen_HK
dc.identifier.emailLiu, X: acliu@hku.hken_HK
dc.identifier.emailChan, DK: dkchan@hkucc.hku.hken_HK
dc.identifier.authorityLiu, X=rp01079en_HK
dc.identifier.authorityChan, DK=rp01046en_HK
dc.description.naturepostprint-
dc.identifier.doi10.1016/j.jaccpubpol.2011.10.001en_HK
dc.identifier.scopuseid_2-s2.0-84862827733en_HK
dc.identifier.hkuros194804en_US
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-84862827733&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume31en_HK
dc.identifier.issue2en_HK
dc.identifier.spage139en_HK
dc.identifier.epage160en_HK
dc.identifier.eissn1873-2070-
dc.identifier.isiWOS:000303227300001-
dc.publisher.placeUnited Statesen_HK
dc.identifier.scopusauthoridLiu, X=8409667100en_HK
dc.identifier.scopusauthoridChan, DK=7402216890en_HK
dc.identifier.citeulike10507056-

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