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
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: Suggested Citation