Net Losses and the Relationship between Auditor Independence and Client Importance: Evidence from a Cubist Regression-Tree Model

This paper uses a cubist regression-tree model to explore when and why auditors compromise their independence. Using data from companies in Taiwan, we study the association between client importance and auditor independence. The results show a positive relationship between client importance and auditor dependence when clients report net losses in the current year. We also find that auditors allow more important clients to manage their discretionary accruals slightly upward, but the clients still report net losses on their financial statements. This suggests that auditors may impair their independence for clients with certain characteristics and acceptable levels of audit risk.