External Auditors and Goodwill Impairments: An Assessment of Proficiency and Consequences

• In Event: Auditing I

Abstract

SFAS 142 (now ASC section 350-20) dramatically increased the degree of management discretion in the assessment of goodwill for impairment and therefore created additional challenges for auditors. We seek to better understand the auditor’s role in auditing this difficult account by examining the proficiency of auditors related to impairments as well as the potential consequences of the impairment decision process. We find that Big N auditors exhibit significantly more skill in the auditing of goodwill compared to non-Big N audit firms. Our study also suggests that goodwill write-offs can create tension between auditors and clients that may ultimately lead to a change in the audit firm. The likelihood of an auditor switch following an impairment, however, does not vary with the amount of goodwill that is written off, which suggests that the mere presence of an impairment rather than the magnitude seems to drive this behavior. In addition, we find evidence that client dissatisfaction is the primary motivation for changing auditors after a goodwill impairment and that this discontent is driven by the clients’ desire to find a more knowledgeable auditor in the subsequent period rather than a more pliable auditor.

Authors

• Douglas Ayres, University of Tennessee-Knoxville

• Terry L Neal, University of Tennessee-Knoxville

• Lauren Carse Reid, University of Tennessee-Knoxville

• Jonathan Shipman, University of Tennessee