Corporate social impact and auditor changes

Abstract

AbstractCorporate social impact has great influence on companies’ financial and litigation risk. Especially, corporate social irresponsibility raises auditors’ concerns about audit risk. Prior research finds that auditors charge higher audit fees to companies engaging in social irresponsible activities. In this study, we investigate the potential effects of corporate social impact on auditor–client relationship. Our results suggest that the likelihood of auditor changes is greater for the socially irresponsible companies and increases with severity. Additional tests suggest that socially irresponsible companies are more likely to have disagreements with their departing auditors and change to smaller auditors. Our findings are robust under different measures and specifications. Our study contributes to the literature by providing incremental evidence that auditors integrate clients’ social impact into their risk management and client selection. Our findings suggest that corporate social impact has become another determinant of auditor–client relationship and has profound effect on audit market competition.