An Ex Post Examination of Auditor Resignations

Catanach, Anthony H.; Irving, James H.; Williams, Susan P.; Walker, Paul L.

doi:10.2139/ssrn.1718757

Cited by 6 publications

(14 citation statements)

References 24 publications

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“…On the other hand, an auditor switch resulting from a dispute with management or discovery of a hidden risk is likely to occur abruptly or randomly [3]. Catanach et al (2011) suggest that auditor resignations before the issuance of the financial statements are most likely due to the discovery of a serious concern over the financial reporting quality. Therefore, the timing of an auditor termination can be useful to outsiders who want to understand the underlying reason for the switch.…”

Section: Jel Classification -M42mentioning

confidence: 99%

Timing of auditor terminations and client firm risk

Her

Howard

Son

2019

MAJ

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Purpose The purpose of this study is to examine whether the timing of auditor terminations signals the riskiness of client firms. Design/methodology/approach This empirical study uses a sample of auditor switches during 2003-2014 to conduct univariate tests and multivariate regression analyses. Auditor switches occurring after the audit report date but before the shareholders’ meeting are classified as “planned” terminations and auditor switches that occur outside of this window are classified as “abrupt” terminations. Findings First, abrupt terminations are more strongly related to client risk factors than planned terminations. Second, relative to planned terminations, abrupt terminations are more likely to result from an auditor resignation rather than a client dismissal. Third, abrupt termination firms are more likely to have internal control weaknesses and experience delistings in the following year. Future operating performance is also worse after an abrupt termination. Finally, auditors and investors view abrupt terminations as riskier than planned terminations. Practical implications As the timing of the auditor termination is publicly available information, it can provide an important signal of deteriorating financial performance to shareholders and potential investors. Abrupt terminations could be costly to shareholders because those firms likely have lower quality financial reporting (due to internal control weakness) and deterioration of future operating performance. Originality/value While concurrent studies investigate the relation between the timing of new auditor appointment and audit quality, this is the first study to document the relation between the timing of auditor termination and the riskiness of client firms.

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Section: Jel Classification -M42mentioning

confidence: 99%

Timing of auditor terminations and client firm risk

Her

Howard

Son

2019

MAJ

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“…Litigation risk is often considered as a dominant explanation for auditor resignations. 1 However, the results from a recent study by Catanach et al (2011) suggest that business risk might be another competing explanation for resignations. Audit risk is a third plausible explanation for auditor resignations.…”

Section: Introductionmentioning

confidence: 99%

“…In a recent study, Catanach et al (2011) also examine whether resignations lead to more frequent delisting when the successor auditor is Big 4 or non-Big 4. Because their analysis is confined to resignations, it is hard to assess whether all auditor switches (dismissal and resignations) are associated with delisting or whether delisting is unique to resignations.…”

Section: Introductionmentioning

confidence: 99%

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Auditor Resignation and Risk Factors

Ghosh

Tang

2015

Accounting Horizons

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SYNOPSIS Although auditor litigation risk is considered as a leading explanation for auditor resignations, audit risk and business risk might also trigger resignations. Auditor litigation risk is defined as the risk of the auditor being involved in a lawsuit, audit risk is defined as the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated and, finally, business risk is defined as the risk associated with the client's survival and profitability. Because the three risk factors are not mutually exclusive, we examine their relevance and incremental importance using measures from the pre- and post-resignation periods. Using summary indices from the pre-resignation period, we find that all of the three ex ante risk indices are incrementally important for resignations, especially when the predecessor auditor is a Big 4 firm. Because the ex ante risk factors are prone to measurement errors and are less likely to capture the auditor's proprietary information about the client, we analyze data from the post-resignation period when the auditor's proprietary information is likely to become publicly known. We find that within a three-year period following an auditor's resignation, clients are more likely to (1) be involved in class-action lawsuits (ex post litigation risk), (2) have internal control problems (ex post audit risk), and (3) to be delisted from a national stock exchange (ex post business risk). Our research demonstrates that auditors consider all three risk factors, and not just litigation risk, in resignation decisions.

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“…Bills et al (2015) show that audit fees are higher for clients in complex industries, reflecting the increased investment in knowledge by the auditor. Prior research has shown that auditors' costly investment in expertise leads to fewer resignations (Catanach et al, 2011;Cassell et al, 2012;Ettredge et al, 2007). Consequently, from the incumbent auditor's viewpoint, audit fee premiums are anticipated so greater, accounting complexities are hypothesized to be negatively associated with resignations.…”

Section: Raf 182mentioning

confidence: 99%

Client industry characteristics and auditor changes

Cairney

Stewart

2019

RAF

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Purpose This study aims to examine whether the industry characteristics of homogeneity, product competition, high auditor competition and accounting standards complexity are associated with auditor changes. Design/methodology/approach Logistic regressions test for significance of the industry characteristics on resignations, dismissals and directional changes to and from Big 4 and nonBig 4 auditors after controlling for client, auditor and engagement factors. Findings The authors report a lower likelihood of auditor resignations with greater accounting standards complexity. The authors also report a greater likelihood of auditor dismissals with greater industry homogeneity, greater product competition and greater auditor competition. Results also show that accounting standards complexity is associated with a lower likelihood of changes from Big to nonBig auditors, and industry homogeneity is associated with a greater likelihood of changes from Big to nonBig. Also, greater auditor competition is associated with a lower likelihood of changes from nonBig to Big auditors. Research limitations/implications Prior research has established the importance of industry characteristics to the market for audit services (Cairney and Stewart, 2015; Wang and Chui, 2015; Cahan et al., 2011; Bills et al., 2015). The authors report that industry characteristics also impact auditor changes. Second, previous research has used various methods that indicate general industry effects on changes. The paper contributes to this research by specifying industry characteristics. Limitations include the reliance on the self-reporting in 8-Ks to identify auditors resigning and firms dismissing auditors. Also, the paper relies on proxies for industry characteristics that were developed in prior research. Practical implications Regulators have expressed concern over the relatively low rates of auditor changes and the problem of lack of auditor choice. By demonstrating a significant effect of industry characteristics on changes, the authors indicate some levers that may be available to influence rates of auditor changes, especially realignments to nonBig. Originality/value This is one of the first studies to examine how specific industry characteristics impact auditor changes. The study may be of interest to academics who are interested in how industry factors influence auditor changes. It may also interest policymakers who could lever the characteristics of industries to address concerns about the low rates of auditor changes.

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An Ex Post Examination of Auditor Resignations

Cited by 6 publications

References 24 publications

Timing of auditor terminations and client firm risk

Timing of auditor terminations and client firm risk

Auditor Resignation and Risk Factors

Client industry characteristics and auditor changes

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