Retiring Auditors’ Client Portfolio Decisions and Audit Quality.

• In Event: Breakfast and Research & Education Table Forum
  In Roundtable Session: Table 2: Audit Partners

Abstract

The horizon issues of pre-retirement top executives or senior professionals have attracted attention from academic research. However, the findings from retiring CEOs may not be applicable to accounting professionals since there are some differences between the two roles. This study takes advantage of the audit reports in Taiwan, which disclose both the accounting firms as well as two signing partners, and tries to examine the decision behaviors of retiring auditors. Specifically, this study uses the retired auditors’ clients which are listed companies from 1987 to 2012 as observations and examines retiring auditors’ client portfolio choice and audit quality. We predict that retiring auditors tend to accept less risky clients since they become conservative and risk adverse when they age. However, our empirical findings suggest that two risk factors, financial risk and audit risk, considered by retiring auditors are indifferent between new clients and continuous clients. In the additional test, we further divide retired auditors into three groups by the ages they retire, and we find auditors retire at ages over 60 tend to accept new clients with less audit risks, which supports our hypothesis. As for audit quality analyses, by using the discretionary accruals of the clients to proxy audit quality, we find audit quality of retired auditors is relatively low in their retiring periods. However, audit quality improves if the retiring auditors are industry-specialized. Collectively, our analyses provide some evidence to show the effect of retirement on audit partners.

Authors

• Li-Chun Kuo, National Taipei University

• Chan-Jane Lin, National Taiwan University