Conclusions and Future Research

This research studied the effect of regulation approach on decisions that require applying the regulation. Subjects in the first and second experiment were asked to make a decision as to whether an audit firm should perform additional non-audit services for a financial statement audit client. Subjects’ decisions were compared to what was argued to be the regulations intended outcome and were interpreted as complying, as under-complying or as over-complying. Over-compliance can be inefficient, since an unintended prohibition of providing a certain service leads to unnecessary switching costs and perhaps lower quality services, because the prohibited service needs to be outsourced to a different provider. However, if a regulation is under-complied with, it does not provide an appropriate safeguard to auditor independence and therefore the risk of impaired auditor independence may be higher.