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SUMMARY: This study examines the association of a comprehensive set of auditorclient relationship bonds (audit firm tenure, audit engagement partner tenure, long duration director-auditor relationships, and alumni affiliation) with the level of economic bonds provided to an audit client (nonaudit services [NAS]). We further examine the effect of these economic and relationship bonds on auditor independence in the context of nonaudit services fees and the propensity to issue going-concern opinions. It is these economic and relationship bonds that have attracted the interest of regulators in their consideration of audit quality. This study was undertaken in Australia in 2002, which provided a context in which all these relationships could be examined before new regulations were introduced. Results show that audit firm tenure and alumni affiliation are associated with clients purchasing auditor-provided NAS, with stronger associations for clients with low agency costs. We further find that long audit engagement partner tenure and a joint effect of auditor-provided NAS and alumni affiliation have a negative effect on the auditor's propensity to issue a going-concern opinion.
INTRODUCTION
Auditor independence is the cornerstone of the auditing profession, a crucial element in the statutory corporate reporting process, and a key prerequisite for adding value to audited financial statements (Mautz and Sharaf 1961). However, corporate collapses associated with accounting scandals in the early 21st century cast doubt over the independence of auditors and the overall value of auditing. In particular, the economic dependence resulting from the provision of nonaudit services (NAS) by audit firms, the familiarity developed from lengthy auditor tenure, and personal relationships built through alumni employees were alleged to contribute to this erosion of auditor independence.1 In order to restore public confidence, regulators and accounting bodies in the U.S., Australia, and elsewhere implemented policies such as mandatory audit engagement partner rotation and prohibition or additional disclosures of certain types of NAS, most notably under the rubric of the 2004 CLERP 9 reforms in Australia and the Sarbanes- Oxley Act of 2002 (SOX) in the U.S. (Corporate Law Economic Reform Program [CLERP- 9 2004; U.S. House of Representatives 2002).
These legislative interventions have, however, occurred despite limited and mixed empirical evidence about the abovementioned potential threats to auditor independence.2 Furthermore, some basic questions underlying this debate remain unanswered. In particular,...