Client Characteristics, Abnormal Accruals, and Auditor Switches: An Empirical Study

Abstract

This paper investigates the associations among client characteristics, abnormal accruals, and auditor switches. Working within a framework that categorizes switches as resulting from auditor-client realignments, disagreements over accounting decisions, or dissatisfaction with auditor/client service quality we find that auditor switches are associated with smaller, higher risk clients. Several other factors such as the issuance of securities and the existence of a modified opinion also increase the probability of an auditor switch. Notably, we do not replicate prior findings by DeFond and Subramanyam (1998) that clients with negative prior year abnormal accruals are more likely to switch auditors, once other controls are in place. Further, our evidence suggests that clients that switch auditors move closer to the industry norm abnormal accrual in the subsequent period than non-switching clients, regardless of the sign of the prior period abnormal accrual. This result differs from D&S who report larger income increasing abnormal accruals for switchers. In general, we find that abnormal accruals add little explanatory power to models of auditor switching in our sample.

Keywords: auditor switching, client risk, opinion shopping, discretionary accruals

JEL Classification: M49, M41, M43