An Ex Post Examination of Auditor Resignations

• Published in: Accounting horizons Vol. 25; no. 2; pp. 267 - 283
• Main Authors: Catanach, Anthony, Irving, James H, Williams, Susan Perry, Walker, Paul L
• Format: Journal Article
• Language: English
• Published: Sarasota American Accounting Association 01.06.2011
• Subjects: Accounting firms; Accounting research; Accounting standards; Audit engagements; Audit risk; Audited financial statements; Auditing; Auditor changes; Auditors; Comparative analysis; Enterprises; Financial reporting; Management decisions; Research methodology; Resignations; Risk; Studies; Variables
• ISSN: 0888-7993; 1558-7975
• DOI: 10.2308/acch-10030

SYNOPSIS The auditor change literature has generally concluded that clients from whom an audit firm resigns are risky clients, yet little is known about the period after a predecessor auditor has resigned from an engagement. We investigate a sample of resignations to determine why an audit firm chooses to accept the role of successor auditor on a presumably risky engagement and whether this decision is associated with a future adverse outcome. Consistent with prior studies, our results indicate that, relative to Non-Big N firms, Big N firms are more selective in accepting the successor auditor role when the predecessor auditor has resigned. Incremental to these prior studies, we find that Big N firms factor in two variables to help mitigate their potential risk—the timing of the predecessor audit firm's resignation and their own firm's expertise. Our analysis of future outcomes indicates that the resigned clients engaged by Non-Big N successor auditors are associated with weaker long-term financial ratios, shorter survival tenures, and a greater proportion of adverse outcomes compared with the resigned clients engaged by Big N successor auditors. Data Availability: Data are available from the sources indicated in the text.