Auditor Selection following Auditor Turnover: Do Industry Peers’ Choices Matter?

• In Event: Auditor Tenure and Turnover

Abstract

Drawing on social norms and social learning theories, this study investigates the influences of industry peer behavior on a client’s auditor choice, following auditor turnover. Using a large sample from the years 1988 to 2012, we find that industry peers’ selections have a significant impact on a client’s subsequent decision to select the type of succeeding auditor, following auditor turnover. Specifically, the propensity of a client to select a Big N (as opposed to a non-Big N) auditor as the succeeding auditor is positively associated with (1) the proportion of its industry auditor-switching peers selecting a Big N auditor in prior period and (2) the proportion of its industry peers audited by Big N auditors in prior period, after controlling for other known, mostly firm-level determinants.
Findings of this study provide new insights into the dynamic process of auditor selection in which companies do not make auditor-selection decisions in isolation of one another as often posited in existing literature and provide a more comprehensive view of the auditor choice phenomenon.

Authors

• Xudong Li, Monmouth University

• Lili Sun, University of North Texas