Should Auditors Be Concerned About Pleasing the Client? An Examination of Auditor Changes Subsequent to an Earnings Revision

• In Event: Local Markets and Auditor Changes

Abstract

In this paper, we investigate whether the likelihood of an auditor “losing the client” is greater when earnings announced in the unaudited earnings release are subsequently revised so that earnings as reported in the company’s annual report are different from those previously announced. We suggest that earnings revisions, which likely result from on-going year-end audit procedures, can serve as a proxy for auditor independence and skepticism. We find that companies with earnings revisions that occur as a result of the year-end audit are more likely to dismiss their auditor in the subsequent year or two. We find consistent results when limiting revision observations to those that reduce earnings or affect allowances and reserves, reduce earnings only, or reduce earnings per share only. In addition, these results hold when we exclude observations with contemporaneous restatement announcements. Our findings confirm that auditors who act independently and in ways that could be construed as displeasing to the client risk losing future fee revenues, even in cases where going-concern issues and prior period misstatements do not exist.

Authors

• Timothy Andrew Seidel, University of Arkansas

• Linda Ann Myers, University of Arkansas

• Susan Scholz, The University of Kansas

• Jacob Zachary Haislip, University of Arkansas