An Examination of Audit Quality Surrounding Engagement Office Changes

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Abstract

We examine the relation between client changes in incumbent auditor engagement offices and audit quality in the U.S. Our analysis suggests that these changes influence audit quality as measured by discretionary accruals and restatements. Consistent with resource constraints (availability) impacting audit quality, we find that changes to smaller (larger) offices result in a higher (lower) abnormal accruals. Our restatement analysis also indicates a higher likelihood of restatements when a client switches to a smaller office. Additional analysis reveals that the observed relations are primarily driven by non-Big 4 auditors, where office level variations in access to audit resources may be less consistent within the firm. Our findings offer empirical evidence on consequences associated with within-firm office level changes and are particularly relevant to regulators, users, and preparers. In particular, our study informs the ongoing debate concerning the notion that mandatory partner rotation can increase the likelihood and frequency of engagement office changes. Our findings suggest that adverse effects on audit quality of office level changes (possibly caused by mandatory partner rotation) appear to be more damaging to clients of non-Big 4 auditors.

Authors

• Adam Greiner, University of Denver

• Julia L Higgs, Florida Atlantic University - Boca

• Thomas Joseph Smith, University of South Florida