What is it about?
This study looks at the "familiarity threat" to auditor independence when the CFO of a company being audited used to be employed by the firm performing the audit. In examining the so-called "alumni effect" among North American auditors and testing the willingness of Bog Four managers to adopt a client's position on a theoretical accounting issue, the study found that 76 percent do so if the client's CFO is a former engagement partner at their Big Four firm, while only 44 percent do so if the CFO isn't.
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Why is it important?
Our findings show that the current requirement of a cooling-off period, during which an accounting firm cannot perform an audit if a top financial or accounting executive of the client was employed by the auditor in the preceding year (U.S. and Canada) or in the preceding two years (E.U. and U.K.), is not enough to avoid the alumni effect, particularly if it requires overcoming social bonds that colleagues often develop.
Perspectives
Regulators need to push for a more robust cooling-off period covering a wider range of management positions, as suggested by the SEC's Public Company Accounting Oversight Board or even an outright ban on auditors taking jobs with client as proposed in some academic research.
Michael Favere-Marchesi
Simon Fraser University
Read the Original
This page is a summary of: The Alumni Effect and Professional Skepticism: An Experimental Investigation, Accounting Horizons, March 2018, American Accounting Association,
DOI: 10.2308/acch-51920.
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