Auditor Switches in the Post-SOX Era: The Case of Firms with Internal Control Weaknesses
35 Pages Posted: 8 May 2010 Last revised: 16 May 2010
Date Written: December 1, 2009
Abstract
Recent changes in the regulatory environment require that auditors express an opinion on the design and effectiveness of their clients’ internal controls. This shift likely impacted auditor-client relationships negatively, especially for firms that receive an adverse internal controls opinion. As a result, such firms may either switch or remain with their incumbent auditors. In this paper, we study the factors that affect this choice. We find that the severity of the internal control problems, the auditor-related fees, the length of auditor-client relationships and the presence of a Big 4 auditor affect the probability that a firm switches auditors. Further analyses examine the factors that affect auditor dismissals and resignations, as well as switches involving Big 4 auditors.
Keywords: Auditor Switches, Internal Control, Material Weakness, Sarbanes-Oxley Act, Section 302 and 404
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