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Disclosing Conflict of Interest - Does Experience and Reputation Matter?

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  • 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.

Suggested Citation

  • Koch, Christopher & Schmidt, Carsten, 2006. "Disclosing Conflict of Interest - Does Experience and Reputation Matter?," Sonderforschungsbereich 504 Publications 06-10, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • 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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    File URL: http://www.sfb504.uni-mannheim.de/publications/dp06-10.pdf
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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 423-428, May.
    2. Ismayilov, Huseyn & Potters, Jan, 2013. "Disclosing advisor's interests neither hurts nor helps," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 314-320.

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