Is Auditor Independence Endogenous: Evidence and Implications for Public Policy

By Dino Falaschetti and Michael J. Orlando
Revised:  June 2004
(First Version: December 2003)
RWP 03-13
Research Division 
Federal Reserve Bank of Kansas City 

Abstract

      This paper examines the extent to which firm-specific levels of auditor-independence are codetermined with alternative inputs to governance production. We identify a number of governance-producing mechanisms that are causally or simultaneously related to auditor independence. These results are shown to be robust to omitted variable bias.  Consequently, prescriptive regulation of auditor independence will be at least partly offset by firm adjustments on alternative governance-producing margins.

Keywords: Corporate Governance, Auditor Independence, Sarbanes-Oxley

JEL Codes: G30, G38, M42

Dino Falaschetti is an assistant professor in the Department of Agricultural Economics and Economics at Montana State University. Michael J. Orlando is an economist at the Federal Reserve Bank of Kansas City. The views expressed herein are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

Falaschetti e-mail:  dino@montana.edu
Orlando e-mail:  michael.j.orlando@kc.frb.org

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