The impact of auditor independence regulations on established and emerging firms
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
Acknowledgements
The authors would like to thank Ann Tarca, Elisabeth Dedman, Tom Smith, Baljit Sidhu, Neil Fargher, Marion Hutchinson, Gerry Gallery and John Watson for their comments on this paper. The authors would also like to acknowledge the input of participants at the 2009 AFAANZ Conference, workshop participants at the School of Accountancy Queensland University of Technology, University of Technology Sydney, and participants at the 2010 European Accounting Association's 33rd Annual Congress.
Citation
J. Clout, V., Chapple, L. and Gandhi, N. (2013), "The impact of auditor independence regulations on established and emerging firms", Accounting Research Journal, Vol. 26 No. 2, pp. 88-108. https://doi.org/10.1108/ARJ-Dec-2011-0045
Publisher
:Emerald Group Publishing Limited
Copyright © 2013, Emerald Group Publishing Limited