Do Investors Benefit from Increased Auditor Independence and Auditor Expertise?

Abstract

An implicit assumption of both audit regulation and research is that more auditor independence and more auditor expertise are better for society because they increase investor confidence and participation in markets. To test this assumption, I conduct a multi-period experiment where investors purchase assets in an environment with Auditor Independence (Independent, Non-Independent), Auditor Expertise (Expert, Average) and Information Asymmetry (High, Low). I find that sellers drastically overvalue auditor independence and auditor expertise in early periods and then, after receiving feedback, adjust their valuations downwards. Buyers do not overvalue auditor independence and auditor expertise and instead produce valuations closer to the expected value of the auditor certification. Auditors (rather than investors) extract most of the benefit of increased independence and expertise, especially in markets with high information asymmetry. There is no indication that increasing independence benefits investors.