Client Importance and Auditor Independence: The Effect of the Asian Financial Crisis

This paper investigates the effect of the Asian financial crisis on the relationship between client economic importance and auditor independence. Using data from 1994 to 2001 in six Asian markets (Hong Kong, Indonesia, Malaysia, Singapore, Taiwan and Thailand), we find that auditors are less likely to compromise their independence for important clients after a crisis. The result is consistent with Coffee's (2001) crash-then-law hypothesis and supports the notion that financial crisis triggers public concern over auditors’ independence. Furthermore, we find the effect of financial crisis on auditor independence is more pronounced in weaker investor protection regimes.