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Disclosing Conflict of Interest - Does Experience and Reputation Matter?

Christopher Koch () and Carsten Schmidt

No 06-10, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

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.

Pages: 45 pages
Date: 2006-09-05
New Economics Papers: this item is included in nep-acc and nep-exp
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged. The authors would like to thank W. Robert Knechel, Hansrudi Lenz, Reiner Quick for valuable comments on earlier versions of the paper.
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Citations: View citations in EconPapers (2)

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