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

Abstract

Prior research documents improvements in pre-acquisition outcomes when acquirer and target firms engage the same audit firm to perform their financial statement audits. We examine whether the advantages of engaging a common auditor prior to an acquisition translate into improved post-acquisition outcomes. We find that common auditors improve post-acquisition financial reporting quality as evidenced by a decreased likelihood of misstatement and of missed internal control material weaknesses following an acquisition. These benefits are attributable to same-office common auditors rather than common auditors from different audit offices. We also find that the effects of common auditors are more pronounced when the acquisition is more material to the acquirer and when the time between acquisition completion and the combined entity’s year-end is shorter. Finally, we find that common auditors are associated with lower non-audit service fees. Our findings suggest that common auditors, especially same-office common auditors, provide important post-acquisition benefits.