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Auditor independence and incentives

Research output: Contribution to Journal/MagazineJournal articlepeer-review

<mark>Journal publication date</mark>1/10/2013
<mark>Journal</mark>International Research Journal of Applied Finance
Issue number10
Number of pages9
Pages (from-to)1326-1334
Publication StatusPublished
<mark>Original language</mark>English


This paper presents two methods of changing the incentives that auditors face with the goal of allowing an audit firm to continue to provide both audit an d nonaudit services (NAS). The first method requires audit firm employees (both auditors and N AS providers) to deposit a substantial share of their revenues into an individual escrow accoun t. If any material misstatements are uncovered in the published financial statements of their clien t, they lose their entitlement to the escrow account funds. The second method taxes NAS and re wards the auditor for knowledge acquisition, and for referring these clients to the N AS providers. Both methods are likely to lead to an augmentation of the quality of the services provide d by an audit firm. Further, they tend to lower the need for one-size fits all measures.