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    Auditor fees and auditor independence ‒ Evidence from g...
    research summary posted November 12, 2014 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.03 Non-Audit Services, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    Auditor fees and auditor independence ‒ Evidence from going concern reporting decisions in Germany.
    Practical Implications:

    The results of this study show that in general market-based incentives, such as loss of reputation, constitute more important factors with regard to auditor independence than an economic dependence caused by higher non-audit fees. However, those safeguards may not be adequate in all situations given the relatively low litigation risk in Germany. The relatively high importance of consulting services performed in audit engagements by the Big 4 group seems to give Big 4 auditors an incentive to continue the auditor-client relationship, and is therefore to be regarded as an additional economic dependence between auditor and client. The explicit representation of liquidity risks through management appears to influence auditor reporting behavior in relation to going concern risks. This information—even if it is not presented in a separate reporting instrument, such as the Lagebericht—could also determine auditor reporting behavior outside Germany.

    For more information on this study, please contact Nicole Ratzinger-Sakel.


    Ratzinger-Sakel, N. V. S. 2013. Auditor fees and auditor independence ‒ Evidence from going concern reporting decisions in Germany. Auditing: A Journal of Practice and Theory 32 (4): 129-168.

    Auditor independence, auditor reporting, non-audit fees, audit fees, Germany
    Purpose of the Study:

    On October 13, 2010, the European Commission published a Green Paper entitled “Audit Policy: Lessons from the Crisis”. Against the background of the recent global financial and economic crisis, this Green Paper proposes primarily reforms to improve auditor independence, and therewith audit quality, and to improve the structure of the audit market. One of the main areas of interest in this Green paper is whether the provision of consulting services by statutory auditors endanger the independence of auditors. This paper examines whether this concern can be empirically substantiated by investigating the potential for non-audit services to impair auditor independence using going concern modifications as a proxy for audit quality. While prior research has focused primarily on Anglo-Saxon environments, this study focuses on Germany because of the country’s unique reporting attributes (i.e., Lagebericht, which is a management report, and its associated Risikobericht, which is a risk report) and lower litigation risk when compared to Anglo-Saxon settings.

    Design/Method/ Approach:

    The analysis is based on a sample of financially distressed, capital market-oriented companies from the study period 2005-2009. Companies are defined as financially distressed if they meet one of the following five criteria: (1) negative equity, (2) negative operating cash flow, (3) negative working capital, (4) negative EBIT in the previous year, and (5) net loss in the previous year. These criteria are taken from a survey of German auditors, asking these to estimate the relevance of a number of indicators relating to the going concern assumption. These indicators are very similar to the criteria used in international studies for identifying financially distressed companies. In light of recent research findings on auditor reporting behavior from the United States, which, using strict control samples, report different results compared to previous U.S.-American studies, this study includes a second control sample. In alignment with the U.S.-American literature, this second control sample includes companies showing both a net loss in the previous year and a negative operating cash flow in the previous year. 

    • The results show no evidence of a significant negative relationship between the level of non-audit fees and the likelihood that an auditor issues a going concern opinion (GCO).
    • However, there is some evidence that the potential for non-audit services to impair auditor independence depends on the type of audit firm conducting the audit (Big 4 compared to non-Big 4). If the level of non-audit fees is relatively high, then Big 4 audit firms are less likely to issue a GCO. However, this result holds only for highly financially stressed clients.
    • The results for the examined unique German reporting environment show a positive association between liquidity risks explicitly presented in the Risikobericht and the likelihood that the auditor includes a GCO in the audit report.
    Independence & Ethics
    Going Concern Decisions, Non-audit Services