An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Dan Li
Georgia Institute of Technology

Beng Wee Goh
Georgia Institute Of Technology; Singapore Management University

Abstract: Previous research has documented the importance of audit independence based on the office level. This study extends Reynolds and Francis (2001, hereafter RF) and also examines the effect of client importance on audit quality at the office level. The main distinction from RF is that my study uses a more accurate measure for client importance, the proportion of total fees paid by specific client over total CPA office revenue. The results are consistent with RF in the sense that neither study finds evidence that economic dependence compromises auditor independence because the auditors do not report more favorably for important client in their offices. However, in 2001, I find no evidence that auditors report conservatively for important clients, in contrast to results documented in RF. Intriguingly, some evidence after the enactment of the Sarbanes-Oxley Act suggests audit conservatism for important clients.

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