Auditor Search Periods as a Signal of Engagement Risk

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Abstract

We examine the effect of auditor search periods (time taken from the dismissal/resignation of the old auditor to the appointment of a new auditor) on audit fees following auditor changes and successor auditor choice. Using a sample of auditor changes for the period 2000-2012, we find that successor auditors charge higher audit fees for clients with longer search periods. Furthermore, clients with long search periods are less likely to be accepted by a Big-N auditor. We also document a more negative stock market response to a new auditor’s appointment following a lengthier search. Our results suggest that academics, investors and regulators should pay attention to lengthy auditor search periods in their evaluations of audit quality and audit risk.

Authors

• Hakjoon Song, The University of Akron

• Vivek Mande, California State University, Fullerton

• Myungsoo Son, California State University, Fullerton