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Economic Dependence and Reputation Concern for the Audit Firm, Audit Groups, and Individual Auditors — The Case of Taiwan

Author

Listed:
  • Pei-Gi Shu

    (Department of Business Administration, Fu Jen Catholic University, No. 510, Jhongjheng Rd., Sinjhuang Dist., New Taipei City 24205, Taiwan)

  • Tsung-Kang Chen

    (Department of Finance and International Business, Fu Jen Catholic University, No. 510, Jhongjheng Rd., Sinjhuang Dist., New Taipei City 24205, Taiwan)

  • Wen-Jye Hung

    (Program of Business Administration, Fu Jen Catholic University, No. 510, Jhongjheng Rd., Sinjhuang Dist., New Taipei City 24205, Taiwan)

  • Tsui-Lin Chiang

    (Program of Business Administration, Fu Jen Catholic University, No. 510, Jhongjheng Rd., Sinjhuang Dist., New Taipei City 24205, Taiwan)

Abstract

Using a sample of 3,274 firm-year data from an internationally renowned accounting firm, we investigate the effects of auditor–client relationship on auditor quality (measured by absolute discretionary accruals (ABSDA)) from the perspectives of audit firm, audit group, and individual auditor, respectively. Our empirical results show that after taking account of the client size effect, the client's fee contribution to audit firm and to audit group is positively related to the client firm's ABSDA. The finding that audit firms and audit groups allow their important clients a higher level of ABSDA supports the economic-dependence hypothesis. Moreover, the economic dependence effect is more saliently found prior to the enactment of 2002 Sarbanes–Oxley Act. Furthermore, the other finding that senior individual auditors require their clients a lower level of ABSDA holds the reputation-concern hypothesis. A synopsis of the overall findings indicates that the argument of economic dependence prevails in the analysis of the audit firm and audit group, while the reputation concern prevails in the analysis of the individual auditor.

Suggested Citation

  • Pei-Gi Shu & Tsung-Kang Chen & Wen-Jye Hung & Tsui-Lin Chiang, 2013. "Economic Dependence and Reputation Concern for the Audit Firm, Audit Groups, and Individual Auditors — The Case of Taiwan," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 16(02), pages 1-28.
    • Handle: RePEc:wsi:rpbfmp:v:16:y:2013:i:02:n:s0219091513500124
    DOI: 10.1142/S0219091513500124
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    Citations

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    Cited by:

    1. Sharad Asthana, 2017. "Diversification by the audit offices in the US and its impact on audit quality," Review of Quantitative Finance and Accounting, Springer, vol. 48(4), pages 1003-1030, May.

    More about this item

    Keywords

    Auditor; auditor–client relationship; economic dependence; reputation concern; M41; M42;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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