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Non-Audit Service and Auditor Independence: The Role of Auditor Incentive Structure

This paper investigates how the different incentives drive auditors' behavior. We examine whether economic dependence on clients impacts the propensity of the auditor to violate her independence in a setting where the auditor also has an incentive to prevent litigation and reputation loss. Since the Procomp scandal has led the litigation environment become severe as compared with past in Taiwan, we have opportunity to investigate how the incentive structure change affects auditor independence. The coefficient for non-audit fees ratio in two litigation environments (before and after Procomp event) has significant difference. Using non-audit fees to replace non-audit fees ratio to conduct regression analysis yields similar results. This finding is consistent with the notion that auditors make a trade-off between gaining service fees and avoiding litigation and reputation loss. Policy implications are also offered.