An experimental study on non-audit service and auditor decisions: Pre- and post-Procomp scandal
Resource
Taiwan Accounting Review 6 (2): 125-152
Journal
Taiwan Accounting Review
Journal Volume
6
Journal Issue
2
Pages
125-152
Date Issued
2007
Date
2007
Author(s)
Abstract
Auditors are faced with two conflicting incentives. On one hand, they have incentives to retain the clients to earn the ”quasi rent”. On the other hand, they have incentives to protect their reputation and avoid litigation risk. Changes in the weighting of these two incentives may affect auditor decisions. This paper reports the results of two experiments in an attempt to examine whether rendering non-audit service to audit clients will influence auditor decisions and whether auditor decisions have changed after Procomp and subsequent scandals in 2004 due to changes in auditors' incentive structure. Recruiting experienced auditors from a Big 4 firm, we conduct two experiments, one before and the other after Procomp scandal. Experiment 1 shows that auditors' decision on the amount of allowance for doubtful accounts is negatively associated with provision of non-audit service in the area of information system design, installation and after maintenance. Experiment 2 indicates no such effect of providing non-audit service. Further, the amount of allowance for doubtful accounts decided by auditors in Experiment 2 is higher than that in Experiment 1. There is an interactive effect of experiment (Experiment 1 vs. 2) and non-audit service provision on auditor decisions. The findings suggest that auditors make a trade-off between the incentive of quasi rent and the incentive of avoiding litigation risk and reputation loss in performing financial statement attestation. Limitations and implications are discussed.
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