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    Policy and Research Implications of Evolving Independence...
    research summary posted November 12, 2014 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.08 Impact of SEC Rules Changes/SarbOx 
    Policy and Research Implications of Evolving Independence Rules for Public Company Auditors
    Practical Implications:

    The results of this study are important to policy makers, academics, and audit committees in evaluating the implications of independence rules for public companies.  The evidence gathered indicates several areas where policy makers could evaluate the effectiveness of the existing independence requirements, or even modify the requirements without sacrificing audit quality or auditor independence – either in fact or in appearance.  Both academics and policy makers could also benefit from additional research in certain areas of auditor independence to more clearly determine the impact of established policies or potential effects of future policies.  Audit committees can also utilize the study to understand the results of prior research performed on the expanded role of the audit committee and the impact of that role on auditor independence.

    For more information on this study, please contact any of the authors.


    Gramling, A., J. G. Jenkins, and M. H. Taylor. 2010. Policy and research implications of evolving independence rules for public company auditors. Accounting Horizons 24 (4): 547-566.

    Auditor independence, independence regulation, policy and standard setting
    Purpose of the Study:

    Auditor independence is fundamental to public accounting. This paper summarizes academic literature related to auditor independence and considers the implications of reported results for public policy and standard setting activities.  The purposes of the study are:

    • To assess the extent to which research supports the proposition that the current independence rules are strongly correlated with independence in fact or independence in appearance; and
    • To offer observations that are based on extant literature regarding possible reconsideration and/or modification to existing independence rules; and
    • To identify areas of research that might inform future decisions related to auditor independence rules
    Design/Method/ Approach:

    The paper consists of a summary of the extant auditor independence literature, and provides an update to previous reviews of the literature.  The authors use the SEC rules on auditor independence as their organizing framework and present summaries of the research in five categories:

    • Financial, Business, and Employment Relationships
    • Provision of Nonaudit Services
    • Fee Issues
    • Rotation Issues
    • Expanded Role of the Audit Committee
    • Financial, Business, and Employment Relationships: There is limited research related to the effects of various types of relationships on independence (either perceived or in fact). Much of the research on employment relationships is from the pre-Sarbanes-Oxley(SOX) era, and finds that perceived independence may be negatively affected. The authors were not able to identify specific research on the effects of financial and business relationships on auditor independence.
    • Provision of Nonaudit Services: Research has demonstrated a relation between the provision of nonaudit services and the perception of reduced audit quality under certain conditions. However, much of the research on the provision of nonaudit services and audit quality as measured by various financial statement elements fails to identify deleterious effects.
    • Fee Issues: Research generally indicates auditors in both pre-SOX and post-SOX environments are more likely to allow significant clients (i.e., larger fees) to engage in aggressive financial reporting if those clients have weak governance and/or monitoring mechanisms.  However, pre-SOX research suggests that perceived independence is not affected by the size of fees.
    • Rotation Issues: Much research reports audit partner rotation improves auditor independence, both perceived and in fact.  However, research findings on audit firm rotation are mixed.
    • Expanded Role of the Audit Committee: Research suggests that audit committees are unlikely to approve permitted nonaudit services unless perceived benefits exceed the perceived risks of independence failure. In addition, disclosure requirements may reduce the likelihood that audit committees approve nonaudit services even if they would increase audit quality. 
    Independence & Ethics
    Impact of SEC Rules Changes/SarBox