Political connections: A threat to auditor independence?

Abstract

Purpose: The purpose of this paper is to examine whether political connections further impair auditor independence by investigating the relationship between non-audit fees and audit fees and as to whether political connections moderate such relationship. Design/methodology/approach: This study employs panel regression analysis. The panel data set consists of 379 firm-year observations for three years from year 2001 to 2003. Findings: Based on 379 firm-year observations for the period of 2001-2003, grounded on two proxies of political connections namely politically connected firms and the proportion of Bumiputras directors, the authors find a positive and significant relationship between non-audit fees and audit fees, and the relationship becomes weaker, only for Bumiputra-dominated firms connected firms. Originality/value: This study contributes to the extant literature by examining the role of political connections in the context of auditor independence. In addition, this study is conducted in Malaysia, which provides a unique institutional environment with the existence of political connections that is built on ethnic grounds.