Common Auditors in Mergers and Acquisitions: The Impact on Post-Acquisition Financial Reporting Quality and Audit Fees

• In Event: Financial Reporting Quality & Auditing

Abstract

Prior studies demonstrate improvements in pre-acquisition outcomes when acquirer and target firms engage the same audit firm (i.e., they use a common auditor). We extend this literature by examining whether the advantages of engaging a common auditor translate into post-acquisition benefits. We find that common auditors decrease the likelihood of income-increasing misstatements but not of internal control material weaknesses (ICMWs) following the acquisition. Furthermore, the synergies from engaging common auditors result in a smaller post-acquisition increase in audit fees for the combined entity. Additional analyses reveal that same-office common-auditor deals are responsible for the decrease in income-increasing misstatements but different-office common-auditor deals are responsible for the audit fee savings. These findings advance the common agent literature and the literature about auditor involvement in mergers and acquisitions.

Authors

• Xi Ai, University of Tennessee

• Andrew Doucet, University of Tennessee-Knoxville

• Linda A. Myers, University of Tennessee-Knoxville

• Kathleen Schuchard, University of Tennessee, Knoxville