What are the Drivers of Audit Quality after an Auditor Change? Evidence from Voluntary and Mandatory Auditor Switches

34 Pages Posted: 4 Apr 2015 Last revised: 17 Aug 2017

See all articles by Ulf Mohrmann

Ulf Mohrmann

Norwegian School of Economics (NHH) - Department of Accounting, Auditing and Law

Date Written: August 16, 2017

Abstract

While the accounting literature implies that increased discretionary accruals follow auditor changes, the underlying causal mechanism of this increase remains unclear. The potential reasons are the loss of the auditor’s firm-specific knowledge or the firm’s opportunistic choice of a new auditor. Differentiating between the drivers is important to understand the consequences of auditor changes and to decide on a regulatory reaction. Using the unique legal environment in the European Union, this study uses both voluntary and mandatory auditor changes to distinguish between these explanations. Whereas the loss of firm-specific knowledge affects both types of auditor changes, mandatory changes are less affected by opportunistic choices. I find that voluntary auditor changes are positively associated with discretionary accruals but not mandatory changes. The difference between the mandatory and voluntary changes is highly significant even after controlling for self-selection. Thus, the decrease in reporting quality is due to the strategic decision to change the auditor rather than to the loss of firm-specific knowledge.

Keywords: Audit Quality, Mandatory Auditor Rotation, Earnings Management, Auditor Choice

JEL Classification: M42

Suggested Citation

Mohrmann, Ulf, What are the Drivers of Audit Quality after an Auditor Change? Evidence from Voluntary and Mandatory Auditor Switches (August 16, 2017). Available at SSRN: https://ssrn.com/abstract=2589486 or http://dx.doi.org/10.2139/ssrn.2589486

Ulf Mohrmann (Contact Author)

Norwegian School of Economics (NHH) - Department of Accounting, Auditing and Law ( email )

Helleveien 30
N-5045 Bergen
Norway

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