Effect of Regulatory Changes on Auditor Independence and Audit Quality

Abstract

This study investigates the impact of CLERP 9 on auditor independence and audit quality. Audit quality is measured by performance‐adjusted discretionary accruals and the auditor's propensity to issue a going‐concern opinion for a financially distressed company. The results show a significant and positive association between auditor‐provided non‐audit services (NAS) fees and the propensity to issue a going‐concern opinion for a financially distressed company post‐CLERP 9, but an insignificant association pre‐CLERP 9. The results show a significant and positive association between NAS fees and the performance‐adjusted absolute value of discretionary accruals pre‐CLERP 9, but this significant association was mitigated by the introduction of CLERP 9. To address the potential impact of the level of abnormal NAS fees on auditor independence, the analysis is extended by incorporating predictions of abnormal NAS fees. Abnormal NAS fees are significantly and negatively associated with the propensity to issue a going‐concern opinion for a financially distressed company and positively associated with discretionary accruals pre‐CLERP 9, but they are not significant post‐CLERP 9. The results provide evidence of improved audit quality after the implementation of CLERP 9. The results will be useful to regulators for the justification of regulatory changes. The findings provide evidence of the effectiveness of regulatory changes, specifically the CLERP 9, on the improvement of auditor independence and audit quality.

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