Auditor Selection Following Auditor Turnover: Do Industry Peerss Choices Matter?

Abstract

Drawing on social norms and social learning theories, this study investigates the influences of same-industry peer firm behavior on a client’s auditor choice, following auditor turnover. Using a large sample from the years 1988 to 2012, we find that industry peers’ selections have a significant impact on a client’s subsequent decision to select the type of succeeding auditor, following auditor turnover. Specifically, the propensity of a client to select a Big N (as opposed to a non-Big N) auditor as the succeeding auditor is positively associated with (1) the proportion of its industry auditor-switching peers selecting a Big N auditor in the prior year and (2) the proportion of its industry peers audited by Big N auditors in the prior year, after controlling for other known, mostly firm-level determinants. These results are robust to a variety of methodological changes. In summary, companies do not make isolated auditor-selection decisions as is usually assumed in prior literature. This study provides new insights into the dynamic process of auditor selection, and provides a more comprehensive view of the auditor choice phenomenon.