Moving to Less Contaminated Audit Offices and the Likelihood of Misstatement

• In Event: Audit Office Pricing and Quality

Abstract

This study investigates whether companies have a lower likelihood of misstatement after changing to a less contaminated audit office. An audit office change is labeled as a "less contaminated audit office change" when the contamination score (Swanquist and Whited 2015) of the successor audit office is lower than that of the predecessor audit office one year before the change. We document that the likelihood of misstatement is significantly lower after companies move to less contaminated audit offices. We find that this effect exists in both the short-term and long-term. We also find that audit offices with lower contamination scores, as a successor audit office, have an incremental effect in decreasing the likelihood of misstatement. Additional analyses indicate that a lower likelihood of missing internal control weaknesses, not reduced income-increasing accruals, is one potential reason for the lower likelihood of misstatement after companies move to less contaminated audit offices. The results suggest that companies successfully improve the credibility of their financial reports.

Authors

• Yuzhou Chen, University of Nebraska - Lincoln

• Thomas C Omer, University of Nebraska-Lincoln