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Is mandated independence necessary for audit quality?

Listed author(s):
  • Jamal, Karim
  • Sunder, Shyam

Independence (in fact as well as in appearance) is widely thought to be necessary for the quality of audits, and audit quality is often equated with independence. Private incentives to demand (and supply) independent certification of financial statements are thought to be insufficient, thus the need to mandate independence through regulation. This study presents data from a field experiment on the unregulated market for certification of baseball cards to assess the role of independence vis-à-vis other auditor attributes such as competence, price, and service on audit quality. In our field experiment, we examine prices of baseball cards sold on eBay with or without third party certification. In addition, the certifier was either independent or deeply immersed in providing other services to market participants. We find that market participants pay a significant premium for certified cards. Certifiers who are deeply immersed (and therefore apparently less independent) also provide higher quality service in the form of being stricter graders, command larger price premiums, and dominate in market share. Implications for independence and audit quality are discussed.

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File URL: http://www.sciencedirect.com/science/article/pii/S0361368211000213
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Article provided by Elsevier in its journal Accounting, Organizations and Society.

Volume (Year): 36 (2011)
Issue (Month): 4 ()
Pages: 284-292

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Handle: RePEc:eee:aosoci:v:36:y:2011:i:4:p:284-292
DOI: 10.1016/j.aos.2011.03.001
Contact details of provider: Web page: http://www.elsevier.com/locate/aos

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  1. Ball, Ray & Robin, Ashok & Wu, Joanna Shuang, 2003. "Incentives versus standards: properties of accounting income in four East Asian countries," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 235-270, December.
  2. Shyam Sunder & Michael Maier & Karim Jamal, 2002. "Privacy in E-Commerce: Development of Reporting Standards, Disclosure and Assurance Services in an Unregulated Market," Yale School of Management Working Papers ysm359, Yale School of Management, revised 01 Dec 2002.
  3. DeFond, Mark L., 2010. "How should the auditors be audited? Comparing the PCAOB Inspections with the AICPA Peer Reviews," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 104-108, February.
  4. DeAngelo, Linda Elizabeth, 1981. "Auditor independence, `low balling', and disclosure regulation," Journal of Accounting and Economics, Elsevier, vol. 3(2), pages 113-127, August.
  5. William R. Kinney & Zoe-Vonna Palmrose & Susan Scholz, 2004. "Auditor Independence, Non-Audit Services, and Restatements: Was the U.S. Government Right?," Journal of Accounting Research, Wiley Blackwell, vol. 42(3), pages 561-588, 06.
  6. Diamond, Douglas W & Verrecchia, Robert E, 1991. " Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-1359, September.
  7. Shyam NMI Sunder & Ronald A. Dye, 2001. "Why Not Allow the FASB and IASB Standards to Compete in the U.S.?," Yale School of Management Working Papers ysm192, Yale School of Management.
  8. Karim Jamal & Michael Maier & Shyam Sunder, 2005. "Enforced Standards Versus Evolution by General Acceptance: A Comparative Study of E-Commerce Privacy Disclosure and Practice in the United States and the United Kingdom," Journal of Accounting Research, Wiley Blackwell, vol. 43(1), pages 73-96, 03.
  9. Joseph Weber & Michael Willenborg & Jieying Zhang, 2008. "Does Auditor Reputation Matter? The Case of KPMG Germany and ComROAD AG," Journal of Accounting Research, Wiley Blackwell, vol. 46(4), pages 941-972, 09.
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