The Relationship between SEC Comment Letters and Subsequent Auditor Change

• In Event: Continental Breakfast and Research & Education Forum
  In Roundtable Session: Table 5: Effects of Auditor Transitions

Abstract

In 2004, the Securities and Exchange Commission (SEC) began electronically releasing its comment letters to registrants and the registrants’ responses. SEC comment letters contain feedback to the registrant on its filings and can provide insight into the quality of those filings. The SEC believes the release of comment letters increases the transparency of the reporting process. Since auditors play an important role in ensuring a company has adequate disclosure controls and must specifically assess the compliance of the financial statements contained within these filings, we contend that the board of directors may view the receipt of a comment letter as evidence of poor audit quality, resulting in the dismissal of the auditor. Alternatively, the auditor may view the receipt of a comment letter as evidence of increased client riskiness, resulting in the resignation of the auditor. We hypothesize and find that there is an increased likelihood of an auditor change following the receipt of a comment letter.

Authors

• Jason E MacGregor, Baylor University

• David N Hurtt, Baylor University

• Jane Baldwin, Baylor University