SOX 404(b) exemption effects on auditor changes

Hoffman, Benjamin W.; Nagy, Albert L.

doi:10.1108/maj-05-2015-1189

Cited by 6 publications

(11 citation statements)

References 32 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…The first column provides the results of the Heckman first-stage model, which is the auditor change model (DS). Consistent with the univariate results and previous findings in auditor change research (Carcello and Neal, 2003; Geiger et al , 1998; Hoffman and Nagy, 2016; Woo and Koh, 2001), companies that are smaller ( SIZE ), possess more debt ( DEBTA ) or engage in more merger and acquisition activities ( M & A ) are more likely to dismiss auditors. These findings are consistent with Ettredge et al (2007).…”

Section: Resultssupporting

confidence: 87%

“…NUMSEGS is measured by the number of business segments. Because auditors charge higher fees for clients with additional risk (Hoffman and Nagy, 2016; Craswell et al , 1995; Hay et al , 2006), the variables LOSS , DEBTA , OPINION and QUICK are used to proxy for risk characteristics. LOSS is an indicator variable that is equal to 1 if operating income is less than 0 in year t , and 0 otherwise.…”

Section: Methodsmentioning

confidence: 99%

“…QUICK is the quick ratio. In addition, following Picconi and Reynolds (2013) and Hoffman and Nagy (2016), I also control for firm performance and return on assets (denoted by ROA ) and report any extraordinary or discontinued items (denoted by EXDISC ). Prior studies showed that Big 4 auditors exhibit a fee premium in comparison with their smaller competitors (Gonthier-Besacier and Schatt, 2007).…”

Section: Methodsmentioning

confidence: 99%

“…I rely on prior auditor change research (Krishnan and Krishnan, 1997; Shu, 2000; Ettredge et al , 2007; Cenker and Nagy, 2008) to determine adequate control variables. I control for firm size (denoted by LnASSET ), market-to-book ratio (denoted by MB ), total debt divided by total equity (denoted by LEVERAGE ), financial condition (denoted by LOSS ), industry shares (denoted by INDSHARE ) and mergers and acquisitions (denoted by M & A ) (Chow and Rice, 1982; Hoffman and Nagy, 2016; Landsman et al , 2009; Schwartz and Menon, 1985).…”

Section: Methodsmentioning

confidence: 99%

See 3 more Smart Citations

The consequences of audit committee quality

Lin

2018

MAJ

View full text Add to dashboard Cite

Purpose This study aims to examine the consequences when audit committees have different economic incentives (i.e. incentive-based compensation) to switch auditors. Design/methodology/approach The author focuses on companies experiencing an auditor switching event (client-initiated dismissals) and uses Heckman’s (1997) two-stage estimation procedure to control endogenous bias. Audit committee quality is measured by the level of incentive-based compensation. Accrual quality and abnormal audit fees are examined over the periods of auditor switches. Findings Using 1,087 US companies between 2006 and 2014, the author found that audit committees’ incentive-based compensation is negatively (positively) associated with accruals quality (abnormal audit fees) only when companies switch from Big 4 to non-Big 4 auditors or switch within non-Big 4 auditors. For companies that switch from non-Big 4 to Big 4 auditors, she found no evidence. Research limitations/implications This study provides a detailed discussion of the consequences of audit committee quality. The findings also contribute to the literature by concluding that economic incentives are associated with ineffective oversight, particularly after auditor switches. Practical implications Sarbanes–Oxley Act and its associated regulations significantly expanded the oversight role of audit committees. However, regulators bypassed restrictions on audit committee compensation. Accordingly, the author suggests that regulators focus on the issue of economic incentives to improve audit committee quality. Originality/value Minimal research has been conducted on the role of audit committees when companies switch to a new external auditor. The author shows that when companies switch auditors, incentive-based compensation significantly affects the monitoring quality of audit committees.

show abstract

Section: Resultssupporting

confidence: 87%

Section: Methodsmentioning

confidence: 99%

Section: Methodsmentioning

confidence: 99%

Section: Methodsmentioning

confidence: 99%

See 2 more Smart Citations

The consequences of audit committee quality

Lin

2018

MAJ

View full text Add to dashboard Cite

show abstract

“…By switching or auditor change, this paper focuses on the ultimate association of clients with auditors. It does not distinguish between dismissal and resignation as in prior studies on auditor changes (Calderon and Ofobike, 2008;Hoffman and Nagy, 2016) because mismatch is bilateral, and clients or auditors may be mismatched with the other.…”

Section: Discussionmentioning

confidence: 99%

Auditor – client match: timing of auditor change following mismatch and improvement through the change

Lai

Leung²

2023

MAJ

View full text Add to dashboard Cite

Purpose This paper aims to first investigate auditor change following mismatch by focusing on the number of times mismatch occurred prior to auditor change and on clients mismatched continuously with auditors for two or more years. Subsequently, it studies the relation of mismatch in the current year with auditor change for clients mismatched in the past year. These issues are important because of the call for regulatory intervention in auditor selection. If market forces achieve improvement in matching, then those forces should be relied upon in auditor selection. Design/methodology/approach This paper adapts the literature to estimate mismatch and uses logistic regressions on an auditor change model to study the timing of auditor change by mismatched clients and on a mismatch model to examine improvement in matching following auditor change. Findings This paper finds that the more frequent mismatches occurred in the past four years, the higher the likelihood of switching in the current year. Clients mismatched continuously for two or more years are more likely to change auditors. This paper also reports that mismatched clients who switch auditors are less likely to be mismatched again after the switch. Research limitations/implications Because market forces reduce mismatch through auditor change, free choice by clients and auditors should be allowed, and regulatory intervention should be introduced cautiously. As investors and other users of financial statements have an interest in seeing that clients get the appropriate auditors for the audit, they will be assured that market forces could achieve the purpose. Thus, the results of this paper address public concern in the regulatory regime and support current audit market practices. Originality/value Prior studies assume a one-year time frame for auditor change to follow mismatch. This paper relaxes this assumption, to better reflect audit market practices, by showing that clients who are more often mismatched with auditors or those mismatched continuously for two or more years could also change auditors. Furthermore, prior studies find that mismatching motivates auditor change, but they do not show that matching improves after the change. This paper extends the literature by shedding new light to show that auditor change improves auditor–client matching.

show abstract

The impact Dodd Frank's Act on audit firm tenure

Akono

2024

J Corp Accounting Finance

View full text Add to dashboard Cite

This study examines the effect of Dodd Frank's Act of 2010 (Dodd's Act) on the duration of the auditor‐client relationship. One of the provisions of Dodd's Act was to permanently exempt nonaccelerated filers from mandatory internal control audits and to maintain the internal control requirement for accelerated filers. The results indicate that average audit firm tenure has increased significantly in the post‐Dodd period, and there is a post‐Dodd increase (decrease) in long and medium (short) tenure. Furthermore, the increase is more pronounced for nonaccelerated filers on average, and varies across big4 and non‐big4 auditors. The inferences are robust to the inclusion of various controls, and to the exclusion of the financial crisis period (2008–2010). Collectively, the findings suggest that Dodd's Act permanent exemption has resulted in lower margins for auditors, and thus motivated audit firms, particularly non‐big4 auditors, to extend their tenure with clients.

show abstract

SOX 404(b) exemption effects on auditor changes

Cited by 6 publications

References 32 publications

The consequences of audit committee quality

The consequences of audit committee quality

Auditor – client match: timing of auditor change following mismatch and improvement through the change

The impact Dodd Frank's Act on audit firm tenure

Contact Info

Product

Resources

About