Enforcement Actions and Auditor Changes

• In Event: Auditor and Executive Changes

Abstract

In this paper, we examine the relation between erroneous financial statements uncovered by enforcement actions and auditor changes. We argue that enforcement actions provide new information about the auditor or the client. Therefore, the relation between a firm and its external auditor should be affected during the ongoing enforcement process. In line with this argument, our empirical findings indicate that firms with erroneous financial statements are more likely to subsequently change the auditor. Further, our results show that firms are significantly more likely to change from a Non-Big4 auditor to a Big4 auditor. This suggests that firms not only want to blame accounting errors on the incumbent auditor, but also commit to improved audit oversight in the future. These effects are even more pronounced if an uncovered error is more severe. Moreover, additional tests suggest that auditor changes take place even before the public announcement of an error.

Authors

• Marcus Brocard, University of Mannheim

• Benedikt Franke, University of Mannheim

• Dennis Voeller, University of Mannheim