The Effect of affiliation on auditor independence

This study investigates whether different types of affiliation pose familiarity threat to auditor independence within a context of an ambiguous (higher v. lower level of ambiguity) audit issue. Using a 2 x 2 x 2 full factorial between subjects design we examine the effect of prior organizational affiliation (alumnus v. non-alumnus client CFO) and professional affiliation (ex-audit partner v. other services ex-partner CFO) on auditor independence (and resulting audit quality) as measured by a number of auditor judgments including the likelihood of accepting the client’s proposed accounting treatment, the preferred as well as the final negotiated dollar amount of the audit adjustment, the level of audit hours allocated and the reliance placed on the client’s CFO. We find no support for the alumni effect but professional (i.e. audit) affiliation appears to be a significant separate construct from the alumni effect. Perceived and actual level of ambiguity of the accounting issue often differ and it is the perceived ambiguity which is of significance. Overall these results indicate that in the post Enron environment auditors seem to be sensitive to independence risk and their independence does not appear to be impaired.