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Why do Politicians Change Auditors? Determinants and Consequences of Municipal Auditor Turnover

Sat, April 6, 9:05 to 10:45am, Hyatt Regency Savannah, TBA

Abstract

We provide the first comprehensive, broad-based empirical analysis of audit firm and partner turnover in the governmental setting, and investigate implications of turnover for municipal audit quality. We first explore determinants of municipal audit firm and partner turnover, finding that municipalities change audit firms more frequently following issuance of “bad news” such as modified audit opinions or material weaknesses in controls. We find modest evidence that municipalities with competitive mayoral elections are relatively more likely to change audit firms, and less likely to change audit partners. We find little evidence that voter activism influences auditor turnover.

We next investigate consequences of audit firm and partner turnover on municipal audit quality, employing both traditional measures of audit quality, along with several constructs unique to the governmental setting, such as auditor errors (and conservatism) in calculating client risk. Main results suggest that new audit firms are more likely to report bad news such as material weaknesses, going concern opinions, modified opinions over federal grants, and more grant audit findings. While new audit firms are not less likely to make errors in assessing client risk, they are substantially more conservative in their risk assessments. Audit partner turnover has no statistically significant impact on audit quality, however, suggesting that municipal audit quality effects are predominantly audit firm-specific rather than partner-specific.

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