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Disclosing Conflict of Interest - Does Experience and Reputation Matter?

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Author Info

  • Koch, Christopher

    (Sonderforschungsbereich 504)

  • Schmidt, Carsten

    ()
    (Sonderforschungsbereich 504, University of Mannheim)

Abstract

Disclosure of conflict of interest is currently seen as an effective tool for reducing threats to auditor independence. Cain, Loewenstein, and Moore (2005) provide evidence for perverse effects of disclosing conflict of interest. Using a controlled laboratory experiment, we replicate their finding that such a disclosure can cause an impairment of auditor independence. However, as subjects gain experience we find that these results revert and auditors give less biased advice. Our results imply that the perverse effects noted in the literature might be an artifact of an environment with inexperienced subjects and of less relevance for the audit environment where main actors are experienced. To the contrary, disclosure of conflict of interest can even improve auditor independence by fostering fairness. Furthermore, we find that disclosure of conflict of interests disturbs reputation building.

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Paper provided by Sonderforschungsbereich 504, Universit├Ąt Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 06-10.

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Length: 45 pages
Date of creation: 05 Sep 2006
Date of revision:
Handle: RePEc:xrs:sfbmaa:06-10

Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged. The authors would like to thank W. Robert Knechel, Hansrudi Lenz, Reiner Quick for valuable comments on earlier versions of the paper.
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Cited by:
  1. George Loewenstein & Daylian M. Cain & Sunita Sah, 2011. "The Limits of Transparency: Pitfalls and Potential of Disclosing Conflicts of Interest," American Economic Review, American Economic Association, vol. 101(3), pages 423-28, May.

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