Clients’ selection of auditors: evidence from the Athens stock exchange

Abstract

The auditing profession is at a crossroad worldwide. It currently faces many challenges especially in Greece where auditor rotation has been instituted as mandatory by EU regulation and the auditing profession is going to be fully liberalized (no limits on audit fees) . Given the Greek environment, it is important to investigate how client companies select auditors. In this study we address three questions. First, can selection of auditors be forecasted? Second, which statistical technique better fits the data set? Third, are there differences in firms’ financial ratios as well as institutional factors that affect auditor choice? Clients’ selection of auditors is considered in a research context using discriminant analysis and logistic regression. The discriminating factors between the two groups of companies include some firm financial ratios and institutional factors: QATA(Quick Assets/Total Assets) when using one year data, and QATA(Quick Assets/Total Assets) and SHAREHOLD (level of shareholdings) when using two year data. Prediction accuracy is close to 60.0 percent using discriminant analysis and around 80.0 percent using logistic regression. The contribution of this study is that it discriminates between the two groups of companies (Big Four versus second-tier or local auditing firms) in an IFRS environment.