United States and European Union Auditor Independence Regulation (eBook)

Dr. Christiane Strohm promovierte bei Prof. Dr. Christoph Watrin am Institut für Unternehmensrechnung und -besteuerung der Universität Münster. Sie ist zur Zeit Visiting Scholar an der University of Southern California, Leventhal School of Accounting, Los Angeles.

Foreword 6
Preface 8
Table of Contents 10
List of Tables 14
List of Figures 16
List of Equations 18
List of Abbreviations 20
Chapter I. Introduction 22
A. Motivation and Objective 22
B. Empirical Studies 26
C. Structure of Dissertation 36
Chapter II. Auditor Independence Risk 38
A. Definitions of Auditor Independence 38
B. Economic Changes: The Market of Audit and Non-Audit Services 40
C. Auditor Independence Risk Models 43
Chapter III. Prior Research on Auditor Independence 52
A. Taxonomy 52
B. Auditor Independence and Incentives 52
C. Auditor Independence and Opportunity 60
D. Auditor Independence and Integrity 64
E. Discussion and Main Research Questions 67
Chapter IV. Auditor Independence Regulation 70
A, Regulation of the United States of America 70
B. Regulation of the European Union 76
C. Comparison of United States and European Union Regulation 84
D. Germany's Reaction towards the Sarbanes-Oxley Act and the European Recommendation and Proposal 89
Chapter V. Task Complexity and Hypotheses Development 94
A. Introduction 94
B. Task Complexity of Regulation 95
C. Knowledge 103
D. Task Motivation 105
E. Summary 109
Chapter VI. Empirical Studies on Auditor Independence Regulation 112
A. Experiment on Regulation Approach and Knowledge 112
B. Experiment on Regulation Approach and Audit Firm-Client Characteristics 126
C. Regulation Approach and Educational Knowledge Effects 146
D. Regression Analysis to Identify Significant Fee Threats 152
Chapter VII. Consequences from the Empirical Findings for the European Capital Market 160
A. Evaluation of the Conceptual Principles-Based Approach 160
B. Experiment on Transparency Effects on Perceived Auditor Independence Risk 168
Chapter VIII. Conclusions and Future Research 188
A. Implications for European Union Regulation 188
B. Main Contributions 197
C. Limitations and Future Research 198
List of Appendices 200
Bibliography 236

Chapter I. Introduction (p. 1)

A. Motivation and Objective

The harsh criticism of the audit profession, which followed in the wake of the Enron collapse, had a major impact on regulators activities worldwide. One result of the Enron debacle was that regulators started to address auditor independence issues as never before, , claiming auditors independence was impaired for the following reasons:

1. Arthur Andersen, the audit firm of Enron, was earning more from the provision of non-audit than audit services ($27 million and $25 million, respectively) and non- audit services included assisting Enron devise accounting schemes compliant with US-GAAP, but which had the objective of keeping liabilities off the balance sheet,

2. Enron had been the managing partners only client for some years and was the principal client of Andersens local office, thus both the partner and the office were economically dependent on retaining Enron as a client,

3. a number of ex-Andersen staff worked for Enron and the relationship was believed to be very intimate, and

4. there were concerns about how Andersen managed its internal quality control and its partner incentive mechanisms (Fearnley and Beattie 2004:118).

After the Enron collapse and several other accounting scandals, , there were demands for significant revisions in accounting practices, foremost being the rotation of audit firms, the implementation of an effective audit committee and the banning of the provision of many non-audit services by incumbent auditors.

Regulating bodies in the United States and the European Union provided two different responses: the Sarbanes-Oxley Act of the United States (2002) and the European Union proposal for a revised 8 th Directive (European Commission 2004a). These regulations include more severe penalties and larger enforcement budgets to help protect financial markets from fraud and other inappropriate behavior.

However, although the goals of both regulations are essentially the same, the paths taken by the American and European regulators to achieve their objectives are quite different. Whereas the Sarbanes-Oxley Act tends to be more rules-based, the European approach tends to be principles-oriented.

The Sarbanes-Oxley Act directly addresses audit firms and auditors, whereas the European proposal issues minimum requirements for the 25 European Member States. Thus, after the European proposal becomes law, it is each Member States responsibility to implement, at a minimum, these requirements into national law to promote harmonization in Europe. This explains to some extent why the European conceptual approach is based on principles, because it provides Member States with the possibility to address the national legal environment by adding local requirements which may either be rules-based or principles-based.

Since I am interested in the effects of solely rules-based and principles-based regulation, it is important for this research to assume that Member States will adopt only the principles-based requirements as proposed by the European Union. However, even if the Member States add local requirements, this research will provide some evidence on whether these additional requirements should be more rules-based or principles-based.