© Larissa Horn

Forschungskooperationen Rechnungswesen, Controlling und Wirtschaftsprüfung

Bank directors’ perceptions of expanded auditor’s reports

Cooperation partner: Prof. Dr. Pran Boolaky, Griffith University, Nathan, Australia

Subsequent to the financial crisis, standard setters developed suggestions on how the audit function could be enhanced in order to contribute to increased financial stability. One related idea is to expand the content of the audit report disclosed to the public, to ensure that it is fit for purpose. This study investigates the impact of expanded audit reports, namely information on the assurance level, the materiality level and key audit matters, on bank directors’ perceptions of the quality of the financial statements, the audit and the audit report, as well as on their credit approval decisions. We conduct an experiment over a sample of 105 bank directors and use regression analysis to determine the predictors of bank directors’ perceptions and decisions. Our findings suggest that the disclosure of the assurance level has a significantly positive impact. In contrast, we cannot prove a material effect of the expansion of the audit report by the materiality level and by key audit matters. As a consequence, standard setters should carefully analyse the effect of additional information before making decisions on an expanded content of the audit report. Such expansions need not to narrow the expectation gap.


Mandatory Audit Firm Rotation and Prohibition of Auditor-provided Tax Services – Evidence from Investment Consultants' Perceptions

Cooperation partner: Prof. Dr. Bent Warming-Rasmussen, University of Southern Denmark, Odense, Denmark; Dr. Ewald Aschauer, Wirtschaftsuniversität Wien, Austria

Audit firm rotation instead of audit partner rotation and a restriction of non-audit services, especially on auditor-provided tax services, are discussed and recently implemented by the European Union to improve auditor independence and audit quality. This study provides experimental evidence on the effects of the rotation system, the impact of non-audit services (in this case auditor-provided tax services), and for the first time also on the interaction effect between both regulatory issues. Based on the assessments of 140 professional investment consultants from credit institutions, our results show that the provision of taxservices by the audit firm decreases independence in appearance and perceived audit quality, while the rotation system does not induce a significant effect. Interestingly, a substitutive interaction effect between the rotation system and the provision of tax services by the auditor on the assessment of audit quality has been revealed. While the provision of tax services is perceived as reducing audit quality in an audit partner rotation setting, it improves perceived audit quality in an audit firm rotation setting. Besides the theoretical contribution, the practical implications of our findings, particularly on balancing regulatory measures in order to create a high audit quality environment, are discussed.


An experimental analysis of the effects of non-audit services and related independence threats on auditor independence in appearance

Cooperation partner: Prof. Dr. Bent Warming-Rasmussen, University of Southern Denmark, Odense, Denmark

The provision of non-audit services by the statutory auditor may have a negative impact on auditor independence. Therefore, the European Union decided to prevent auditors from offering non-audit services to audit clients to a large extent. Prior research revealed that different advisory services have different effects on perceived auditor independence. This could be caused by differences in number and intensity of independence threats (self-interest, familiarity, self-review, advocacy). Therefore, this experimental study investigates the effect of such threats on independence perceptions of German individual investors. Multivariate analyses indicate that a high self-interest and a high familiarity threat may impair auditor independence in appearance. On the other hand, our findings do not reveal a significant effect of an existing advocacy threat on investors’ trust in auditor independence. A negative effect of a self-review threat is not directly confirmed. However, the provision of services with regard to internal controls, and thus the self-review threat, interacts with the self-interest threat. They potentially impact perceived auditor independence negatively when non-audit fees are high. In contrast, no significant interactions with familiarity are found. Based on these findings a general prohibition of non-audit services does not seem to be necessary. On the other hand, a non-audit fees cap might be reasonable.


Investors’ Perception of Non-Audit Services and Their Type: Evidence from Germany

Cooperation partner: Prof. Dr. Aasmund Eilifsen, Norwegian School of Economics, Bergen, Norway; Dr. Steffen Umlauf, Deloitte

This study investigates investors’ perceptions of auditor-provided non-audit services (NAS) in Germany, a non-Anglo-American institutional environment. We use earnings response coefficients (ERC) to measure investors’ perceptions of earnings quality and examine the associations between ERC and NAS fees. The findings show that investors in Germany perceive large NAS negatively, indicating concern of impaired auditor independence. This concern also relates to the individual components of NAS (assurance NAS, tax NAS, and other NAS). The results may reflect a low investor protection in Germany, particularly auditors’ limited liability and the role of public oversight of auditors. Flexibility inherent in the German legal rules on the provision of NAS, auditor fees disclosure practice, and the general influence of tax considerations over financial reporting in Germany may also contribute to investors’ concerns. We discuss the relevance of the findings for the new EU regulation on providing NAS to public interest entities (PIEs) including Member States’ exercise of options to allow or prohibit certain NAS.


Organization of the 8th EarNet Symposiums 2015

Cooperation partner: Prof. Dr. Alain Schatt, HEC Lausanne, Switzerland; Prof. Dr. Marleen Willekens, KU Leuven, Belgium; Prof. Dr. Stuart Turley, University of Manchester, UK, et al.


The effects of non-audit services on perceived auditor independence: An experimental investigation of supervisory board member’s perceptions

Cooperation partner: Prof. Dr. Roger Meuwissen, Maastricht University, Netherlands

In the wake of the financial crisis, the issue of auditors providing non-audit services to their audit clients is being considered once again by regulators. The European Commission intends to prohibit the provision of most non-audit services to audit clients. In addition, large audit firms will not be allowed to provide any public-interest-entity non-audit services (European Commission, 2011). The reason is the notion that the simultaneous provision of audit and non-audit services to clients may endanger auditor independence. Therefore, audit services should not be provided in cases where „an objective, reasonable and informed third party would conclude that the statutory auditor's or audit firm's independence is compromised“ (European Commission, 2010). There is, however, limited evidence on whether informed parties, such as supervisory boards, perceive the provision of non-audit services as negatively affecting auditor independence. This study therefore investigates the perceptions of supervisory board members on the effect of the simultaneous provision of non-audit services and audit services on auditor independence in Germany. The results show that the provision of non-audit services is indeed perceived as having a negative effect on auditor independence. Furthermore, in distinguishing between various forms of non-audit services, human resource (HRM) consulting is perceived as having the most negative impact.