The Impact of SEC Comment Letters on Auditor Retention

Abstract

SYNOPSIS Prior literature shows that the receipt of an SEC comment letter strains the auditor-client relationship by increasing the likelihood of a change in auditor. This paper examines this result by investigating whether an auditor’s involvement in responding to comment letters mitigates this effect. Although comment letters are frequently associated with financial reporting issues, clients and auditors may perceive the issues and blame for issues differently, thereby creating friction in the auditor-client relationship. By involving auditors in responding to comment letters, clients demonstrate a better working relationship with their auditor, which may lead to auditor continuance. This study indicates that although auditor switching increases after receipt of an accounting-related comment letter, auditor involvement in responding to the SEC reduces the likelihood of an auditor change in the following period. This suggests that auditor involvement in comment letter responses strengthens the auditor-client relationship.