Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Interdependence Between Audit Market Structure and the Quality of Financial Reporting: The Case of Non-Audit Services

Contents:

Author Info

  • Christopher Bleibtreu

    ()
    (Department of Economics, University of Konstanz, Germany)

  • Ulrike Stefani

    ()
    (Department of Economics, University of Konstanz, Germany)

Abstract

Recently, the Commission of the European Communities has put up for discussion various reform proposals intended to enhance the reliability of audits and to re-establish trust in the financial market. In particular, the EU Commission seeks to strengthen auditor independence and to decrease the high level of audit market concentration. Using the example of a ban on the joint provision of audit and non-audit services, we show that strengthening auditor independence and reducing market concentration may represent competing goals. Neglecting such interdependencies in the debate on regulation could thus lead to ill-advised regulatory decisions. Our arguments are based on a model that integrates a strategic auditor-manager game into a circular market matching model. We show that prohibiting general consulting services can result in a decrease in the equilibrium number of audit firms (i.e., in an increase in market concentration). Moreover, a ban on the joint supply of general consulting services might even have negative effects on the quality of audited financial statements, since the average probability that managers will misreport increases. Our model predicts the opposite effects for a prohibition on audit-related consulting services that managers purchase in order to tempt auditors to compromise their independence. The effects of a ban on “single-provider” auditing and consulting thus depend on the kind of services an auditor is allowed to offer and, in particular, on the point in time at which consulting services are negotiated.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.wiwi.uni-konstanz.de/workingpaperseries/WP_Bleibtreu-Stefani_1-12-neu.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2012-01.

as in new window
Length: 44 pages
Date of creation: 13 Feb 2012
Date of revision:
Handle: RePEc:knz:dpteco:1201

Contact details of provider:
Postal: D-78457 Konstanz
Phone: +49-7531-88-2566/2565
Fax: +49-7531-88-4135
Web page: http://www.wiwi.uni-konstanz.de/fb
More information through EDIRC

Order Information:
Web: http://www.wiwi.uni-konstanz.de/fb

Related research

Keywords: Auditing; Non-Audit Services; Audit Market Concentration; Auditor Independence; Quality of Audited Financial Statements;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. David Burgstahler & Michael Eames, 2006. "Management of Earnings and Analysts' Forecasts to Achieve Zero and Small Positive Earnings Surprises," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5-6), pages 633-652.
  2. Mark Wilson & Liang Wui Wang, 2010. "Earnings management following chief executive officer changes: the effect of contemporaneous chairperson and chief financial officer appointments," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(2), pages 447-480.
  3. Quick, Reiner & Sattler, Matthias, 2011. "Das Erfordernis der Umsatzunabhängigkeit und die Konzentration auf dem deutschen Markt für Abschlussprüferleistungen," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 56503, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
  4. Mark L. DeFond, 2002. "Do Non-Audit Service Fees Impair Auditor Independence? Evidence from Going Concern Audit Opinions," Journal of Accounting Research, Wiley Blackwell, vol. 40(4), pages 1247-1274, 09.
  5. Jacob K. Goeree & Charles A. Holt, 2000. "Ten Little Treasures of Game Theory and Ten Intuitive Contradictions," Virginia Economics Online Papers 333, University of Virginia, Department of Economics.
  6. Divesh S. Sharma & Jagdish Sidhu, 2001. "Professionalism vs Commercialism: The Association Between Non-Audit Services (NAS) and Audit Independence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(5-6), pages 595-630.
  7. Pourciau, Susan, 1993. "Earnings management and nonroutine executive changes," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 317-336, April.
  8. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  9. Goeree, Jacob K. & Holt, Charles A. & Palfrey, Thomas R., 2003. "Risk averse behavior in generalized matching pennies games," Games and Economic Behavior, Elsevier, vol. 45(1), pages 97-113, October.
  10. Chee-Yeow Lim & Hun-Tong Tan, 2008. "Non-audit Service Fees and Audit Quality: The Impact of Auditor Specialization," Journal of Accounting Research, Wiley Blackwell, vol. 46(1), pages 199-246, 03.
  11. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
  12. Paul K. Chaney, 2002. "Shredded Reputation: The Cost of Audit Failure," Journal of Accounting Research, Wiley Blackwell, vol. 40(4), pages 1221-1245, 09.
  13. Holthausen, Robert W. & Larcker, David F. & Sloan, Richard G., 1995. "Annual bonus schemes and the manipulation of earnings," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 29-74, February.
  14. Scott Whisenant & Srinivasan Sankaraguruswamy & K. Raghunandan, 2003. "Evidence on the Joint Determination of Audit and Non-Audit Fees," Journal of Accounting Research, Wiley Blackwell, vol. 41(4), pages 721-744, 09.
  15. Guidry, Flora & J. Leone, Andrew & Rock, Steve, 1999. "Earnings-based bonus plans and earnings management by business-unit managers1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 113-142, January.
  16. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
  17. Murphy, Kevin J. & Zimmerman, Jerold L., 1993. "Financial performance surrounding CEO turnover," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 273-315, April.
  18. David Hay & Robert Knechel & Vivian Li, 2006. "Non-audit Services and Auditor Independence: New Zealand Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5-6), pages 715-734.
  19. Dye, Ronald A., 1991. "Informationally motivated auditor replacement," Journal of Accounting and Economics, Elsevier, vol. 14(4), pages 347-374, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Christopher Bleibtreu & Stephan Ulrike Stefani, 2013. "The Effects of Mandatory Auditor Rotation on Low Balling Behavior and Auditor Independence," Working Paper Series of the Department of Economics, University of Konstanz 2013-14, Department of Economics, University of Konstanz.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:knz:dpteco:1201. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gundula Hadjiani).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.