Auditor-Client Disagreements, Auditor Resignations, And Audit Fees Charged By Successor Auditors

Dongliang Lei,Yu Zhou,Yakun Wang

doi:10.19030/jabr.v36i1.10321

Abstract

This paper investigates the effects of auditor-client disagreement disclosure on auditor resignations and audit fee charged by successor auditors. Using a matched sample of auditor changes over the period 2003-2016, we find that auditor resignations are more often accompanied by auditor-client disagreements. We also find that Big 4 auditors are more likely to resign from their engagements when they disagree with their clients. Further, we document that successor auditors charge higher audit fees for firms that have disagreements with their predecessor auditors. Relative to non-Big 4 auditors, Big 4 successor auditors charge even higher audit fee for disagreement firms.

Highlights

I n 1971, the Securities and Exchange Commission (SEC) required public companies to report any change of independent auditor along with a disclosure of any auditor-client disagreement on Form 8-K (SEC, 1971).1 The 8-K regulatory requirements suggest that regulators believe that auditor-client disagreements are important “reportable events” that require public dissemination because market participants are likely to benefit from this information
We find that disagreement firms have significantly longer audit report lag and pay higher audit fee
Prior studies document that poor performance increases the likelihood that managers make aggressive accounting and reporting choices (Petroni, 1992; Sweeney, 1994; Beneish, 1997). Since both income-increasing accounting practices and aggressive accounting choices might lead to higher risk of material misstatements, disagreement firms are associated with higher risk because they have shorter audit tenure and higher probability of loss

Summary

Introduction

I n 1971, the Securities and Exchange Commission (SEC) required public companies to report any change of independent auditor along with a disclosure of any auditor-client disagreement on Form 8-K (SEC, 1971). The 8-K regulatory requirements suggest that regulators believe that auditor-client disagreements are important “reportable events” that require public dissemination because market participants are likely to benefit from this information. I n 1971, the Securities and Exchange Commission (SEC) required public companies to report any change of independent auditor along with a disclosure of any auditor-client disagreement on Form 8-K (SEC, 1971).. The 8-K regulatory requirements suggest that regulators believe that auditor-client disagreements are important “reportable events” that require public dissemination because market participants are likely to benefit from this information. Defond and Jiambalvo (1993) suggest that an auditor-client disagreement usually occurs when the auditor objects to a controversial accounting procedure that the management uses or proposes to use. A disagreement might get resolved if a manager updates his position on an accounting issue to a compromised position during the auditorclient negotiation. No switch of auditor occurs, and the auditor-client disagreement is not required to be disclosed in Form 8-K. When risk of material misstatement is high, auditor-client disagreement might precipitate auditor resignations

Methods

Results

Conclusion