Disclosing conflict of interest: does experience and reputation matter?

Christopher Koch and Carsten Schmidt

No 06-10, Papers from Sonderforschungsbreich 504

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.

Keywords: Auditor Independence; Audit Fees; Nonaudit Fees; Experimental Economics (search for similar items in EconPapers)
JEL-codes: C91 D82 G28 M42 (search for similar items in EconPapers)
Date: 2006
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https://madoc.bib.uni-mannheim.de/2580/1/dp06_10.pdf

Related works:
Working Paper: Disclosing Conflict of Interest - Does Experience and Reputation Matter? (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:mnh:spaper:2580

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