Contingent economic rents: Insidious threats to audit independence

Abstract

The primary purpose of this study is to examine how and why contingent economic rents can lead to biased audit judgment via a cognitive processing phenomenon known as predecisional distortion of information. The secondary research objective is to develop a more refined measure of predecisional distortion, thereby yielding a more robust and predictive metric. A total of 73 audit partners representing four of the Big Five CPA firms participated in a two (low-balling: present or absent) by two (non-audit revenue: present or absent) between-subjects experiment. Research findings indicate that contingent economic rents can potentially impair audit independence, as such rents heighten an initial desire to maintain a long-term relationship with the client, trigger favorable predecisional distortion of client-related information, and bias audit judgment in favor of the client. Study results also reveal that the refined predecisional distortion metric is more predictive than past measurement techniques. Between-subject and within-subject debriefings suggest that predecisional distortion of information operates, at least partially, at the subconscious level.

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