ECONOMIC BONDING AND AUDIT QUALITY
Keywords:
Economic Bonding, Audit Quality, Abnormal Audit Fees, Auditor Independence and Normal Audit Fees.Abstract
The purpose of this paper is to assess Economic Bonding and Audit Quality. Economic bonding happens when clients overpay auditors in exchange for granting managers financial reporting discretion. Following a string of significant accounting scandals involving Enron, Worldcom, and other companies, as well as the catastrophe of Arthur Anderson, a former Big Five audit firm, auditor independence and audit quality have come under intense scrutiny. It is imperative for regulators and investors to comprehend the circumstances and reasons behind auditors' potential compromise of independence and quality. The objective of this paper is to evaluate economic bonding and audit quality. The methodology adopted for this study is library approach which focuses on content review of extant literature on economic bonding and audit quality. We came to the conclusion that the economic bonding perspective, which sees unusually large audit fees as bribes or economic rents that the auditor receives, is correct. Therefore, an abnormally large fraction of audit fees above standard audit fee levels incentivize auditors to compromise their impartiality. Conversely, the "audit effort view" forms the foundation of the opposite theory. In order to preserve their reputation or stop auditors from raising audit risk in order to benefit management, higher audit fees are indicative of longer working hours and improved audit standards. The study suggested that management of publicly traded companies should use one of the larger audit firms; if this isn't feasible, management should choose an audit firm whose morality and ethics are unquestionable
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