Auditor Responses to Shareholder Activism

• In Event: Archival Studies of Auditor Behavior

Abstract

This paper investigates how auditors respond to shareholder activism against their clients. Specifically, we test whether confrontational activism impacts three aspects of the auditor-client relationship: going concern opinions, internal control opinions, and audit fees. We find that auditors are more likely to issue first-time going concern opinions and adverse internal control opinions to clients that are experiencing confrontational activism. In both instances, however, the outcomes seem to reflect increased auditor diligence (i.e., higher quality reporting) rather than purely reflecting increased auditor conservatism. We also find that audit fees are substantially higher in the presence of confrontational activism. The most likely explanation for our findings across all three audit outcomes is that the increased scrutiny associated with activist campaigns increases auditors’ concerns about reputational damage and litigation risk. Consistent with this notion, we find that targets of confrontational activism are more likely to experience accounting-related lawsuits. Overall, the results of this paper identify a number of relationships that may be important to activists, target firms, and auditors.

Authors

• Feng Guo, Iowa State University

• Chenxi Lin, University of Kansas

• Adi Masli, University of Kansas

• Michael S Wilkins, University of Kansas