Client industry characteristics and auditor changes

Abstract

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.

Association of Audit Committee Accounting and Finance Expertise with Earnings Quality

“…The criteria for grouping companies into complex and non-complex industries follow the previous study [27], as used by other researchers [28] and [29]. The classification of companies according to the Jakarta Stock Industrial Classification (JASICA) is compared to the list of industrial groups to determine whether the company is included in the category of complex or less complex industry [27].…”

أثر خصائص صناعة عمیل المراجعة على العلاقة بین سمعة منشأة المحاسبة والمراجعة ودرجة تخصصها الصناعی- دلیل من الشرکات المقیدة بالبورصة المصریة

“…. (Cahan et al, 2011;Francis and Gunn, 2015;Musah et al, 2018;Cairney and Stewart, 2019;Bae et al, (Craswell et al, 1995;Purnamasari and Negara, 2017 ;Hapsoro and Santoso, 2018) .…”