The impact of objectivity on the auditors reporting decisions: An office-level analysi

This paper investigates the impact of economic dependence and risk of reputation loss on an auditor's objectivity in the reporting decisions the auditor makes regarding a client's financial statements. Two of these reporting decisions include the issuance of a going concern modification and the degree of reporting discretion given to the client. An auditor's objectivity may be impaired due to the economic dependence which arises from the client appointing and paying the auditor for services rendered, or strengthened by the risk of reputation loss imposed on an auditor who fails to maintain objectivity. Both economic dependence and risk are related to the client's importance to, or influence on, the auditing office responsible for the engagement.;The paper employs a different measure of client influence than that used in previous research. It develops a measure of client influence which relates the size of a client to the local office which is responsible for maintaining the audit relationship with that client and issuing the audit report. A more objective auditor is expected to be "tougher" on the client. This toughness may be observed in two outcomes of the auditor client relationship: going concern reporting and client financial discretion with respect to earnings management. A more objective, tougher auditor is more likely to issue going concern audit reports when warranted and less likely to permit the client a large degree of reporting discretion.;The basic findings of the empirical analysis are that economic dependence does not appear to impact auditor objectivity for either going concern reporting or for financial reporting discretion. Rather, the risk of reputation loss imposed on the auditor by a more influential client appears to result in higher auditor objectivity.