Factors Related to Auditor‐Client Disagreements over Income‐Increasing Accounting Methods*

Abstract

Abstract. The Securities and Exchange Commission requires disclosure of auditor-client disagreements that precede a change in auditor. Although prior research has documented that disclosure of disagreements is associated with a decline in equity value, no empirical work has examined factors that result in auditor-client disagreements. We hypothesize that managers are motivated by debt and compensation arrangements to propose methods that are objected to by their auditors (resulting in a disagreement). Because of their greater independence, we also hypothesize that reported disagreements will be more likely for Big Eight (now Big Six) auditors. A comparison of 40 firms that changed auditors and reported a disagreement with a control group of 40 firms that simply changed auditors revealed that disagreement firms are more likely to have debt covenant violations. Disagreement firms are also more likely to have higher leverage, a decline in earnings, and Big Eight auditors. For firms that disclosed the magnitude of the disagreement's effect on earnings, the use of the questionable procedure tended to enhance "flat'ê arnings growth.R^sumi. La Securities and Exchange Commission exige que soit publi^e l'information relative aux desaccords vfirificateur-client qui precedent un changement de verificateurs. Bien que les recherches anterieures aient demontr^ que la publication de cette information est accompagn^e d'un d^clin de la valeur des tities, aucun travail empirique n'a examine les facteurs qui sont a I'origine des disaccords verificateur-client. Les auteurs posent Thypothese selon laquelle ce sont le passif et les regimes de remuneration qui motivent les gestionnaires a proposer des methodes auxquelles s'opposent les verificateurs (et qui donnent lieu a un disaccord). Les auteurs posent egalement l'hypothese selon laquelle il est plus probable que les desaccords declares mettent en cause tes huit

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