The Impact of Non-Mandatory Corporate Governance on Auditors' Client Acceptance, Risk and Planning Judgments

Accounting & Business Research, Vol. 38, No. 2, June 2008

Posted: 27 Mar 2008

See all articles by Divesh Sharma

Divesh Sharma

Kennesaw State University, School of Accountancy

El'fred Boo

Nanyang Business School, Nanyang Technological University

Vineeta Sharma

Florida International University

Date Written: 2008

Abstract

We examine the effect of non-mandatory corporate governance practices on a comprehensive set of audit judgments. We provide initial evidence on how auditors respond to corporate governance in an institutional environment where corporate governance is not mandated by law. Based on the agency and resource dependence theories, we hypothesise associations between corporate governance and auditors' judgments relating to client acceptance, risk assessments, and the extent and timing of substantive testing. Sixty Big 4 audit managers from Singapore are randomly assigned to one of three experimental conditions comprising weak, moderate and strong corporate governance. Our results show auditors make more favourable client acceptance judgments when corporate governance is stronger. Clients with stronger corporate governance are assessed as having lower control environment risk. After controlling for control environment risk, we find that stronger corporate governance increases auditors' reliance on the client's internal controls and reduces the extent of substantive tests. When corporate governance is stronger, we observe that auditors conduct more substantive testing during the interim period compared to the year-end. Our findings suggest that audit strategies are responsive to the strength of a client's corporate governance.

Keywords: agency theory, corporate governance, resource dependence, audit judgment, Sarbanes-Oxley Act

JEL Classification: M41, M49, G34, C91

Suggested Citation

Sharma, Divesh Shankar and Boo, El'fred Hian Yong and Sharma, Vineeta, The Impact of Non-Mandatory Corporate Governance on Auditors' Client Acceptance, Risk and Planning Judgments (2008). Accounting & Business Research, Vol. 38, No. 2, June 2008, Available at SSRN: https://ssrn.com/abstract=1113194

Divesh Shankar Sharma (Contact Author)

Kennesaw State University, School of Accountancy ( email )

Kennesaw, GA 30144
United States

El'fred Hian Yong Boo

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Vineeta Sharma

Florida International University ( email )

Miami, FL 33199
United States

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