Trade-off Between Reputation Concerns and Economic Dependence for Auditors — Threshold Regression Approach

This chapter utilizes a panel threshold regression model to plow two of the most profound issues in auditing: First of all, does economic bonding compromise audit quality and secondly, does the SOX’s prohibition of certain nonaudit services mitigate the association between fees and auditor independence? Empirical results suggest that there indeed exists a threshold value which would impair audit quality once nonaudit services surpass it. Moreover, the threshold value has yet plummeted subsequent to the SOX’s prohibition of certain nonaudit services designated to mitigate auditors’ economic bonding with their clients, suggesting that the effort made by the authorities has been by large ineffective. The results lead us to ponder whether the fee structure and the existing practice of employing auditors at the discretion of the management should be rigorously reviewed to warrant audit quality.