Client employment of previous auditors: shareholders’ views on auditor independence

Abstract

The role of auditors is to add credibility to financial information and to reduce the risk of management manipulation or concealment. It is vital that auditors be independent of company management. In practice, however, various circumstances may pose a potential threat to auditor independence. One of these threats is the employment of an ex-auditor by a client company. Relatively little research has so far been carried out in this area. We investigated whether investors (both private and institutional) perceived the employment of a former auditor by an audit client as a threat to the independence of the audit firm and whether they would invest in a company which had ‘poached’ a member of the audit team. We found little evidence of concern on the part of institutional investors about the risks posed by auditors joining former client companies. However, private investors demonstrated significantly greater levels of concern about issues related to auditor independence. Although there were differences in the views of institutional and private investors, there did not appear to be a strong demand from respondents to our survey for more stringent restrictions on the movement of auditors from audit firms to audit clients.

Keywords:

• audit firm alumni
• auditor independence
• audit risks

Acknowledgements

The authors wish to record their sincere thanks to two anonymous reviewers and to the editor for their helpful and well considered comments over the course of the development of this paper. We are also grateful for the invaluable assistance of Professor Mark Clatworthy and Dr Peter Morgan of Cardiff Business School in refining the statistical analyses. However, we alone are responsible for any errors which remain.