Do markets react to required and voluntary disclosures associated with auditor realignments?

Abstract

Abstract This manuscript investigates whether required and voluntary Form 8-K (Item 4.01) auditor realignment disclosures in 2004 and 2005 convey information content to investors in a post SOX era. Unlike prior research, our results indicate that internal control material weakness and non-reliance on management representation disclosures convey negative information content, while audit scope limitation, earnings restatement and client–auditor disagreement disclosures do not convey information content in a post SOX era. Also, unlike prior research, voluntary disclosures such as fee disputes do not convey information content. Similar to prior research, auditor resignation disclosures convey information content. Our results also indicate that other required disclosures such as when an auditor realignment occurs after a company has received a going concern opinion and when a company switches to a larger audit firm (e.g., from a local/regional firm to a Big 4 firm) are associated with positive CARs.