The impact of auditor independence regulations on established and emerging firms

Victoria J. Clout, Larelle Chapple and Nilan Gandhi

Accounting Research Journal, 2013, vol. 26, issue 2, 88-108

Abstract: Purpose - – The purpose of this paper is to study whether auditor independence reforms introduced in 2004 led to an enhancement in earnings quality in the post-reform era. Design/methodology/approach - – This study predicts that as the cost of compliance will vary based on a firm's existing corporate governance regime and the level of external scrutiny (monitoring) it faces, we compare the earnings quality of a sample of “established” (S&P/ASX 100) to a sample of “emerging” (S&P/ASX Small Ordinaries Index) firms. The paper examines the reporting behaviour of the two groups of listed entities, covering the regulatory change period 2003-2006. The paper uses regression modelling to test the associations between increased audit independence, earnings quality and corporate governance mechanisms over the pre- and post-regulatory period. Findings - – The paper's results confirm that earnings quality for the established firms was enhanced in the post-reform period; while this was not the case for emerging firms. The evidence also suggests that corporate governance mechanisms of board independence and board financial skill are associated with higher earnings quality; while the higher the concentration of insider firm ownership is associated with lower earnings quality. Practical implications - – This study provides policy makers with evidence as to changes in reporting behaviour following law reform aimed at strengthening auditor independence. Originality/value - – The studies on earnings quality are informed by the US market practices. Australia provides a unique setting through its auditor independence reforms to examine the impact of reform choices. This study also investigates two specific subsets of the market: established firms and emerging firms.

Keywords: Corporate governance; Auditor independence; Earnings quality; Auditors (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:arjpps:v:26:y:2013:i:2:p:88-108

DOI: 10.1108/ARJ-Dec-2011-0045

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