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Author: Jayanthi Krishnan
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Litigation against auditors has increased dramatically in recent years. Auditors can offset litigation risk in a number of ways, including improved audit quality and planning, increases in audit fees and increases in the issuance of modified opinions. Auditors can also adjust their client portfolios by becoming more selective in their choice of new clients and by withdrawing from high-risk engagements. We test the hypothesis that litigation risk motivates auditor resignations by comparing resignation companies with two groups of client companies that dismissed their auditors: one matched with the resignation companies on industry and year, and the other matched on year alone. We find resignation companies differ from dismissal companies along dimensions that capture the probability of litigation: financial distress, variance of abnormal returns, auditor independence, tenure and a modified (particularly going-concern) opinion. We also construct a litigation proxy based on a prior litigation-prediction model and find that the proxy is positively associated with the probability that the auditor will resign rather than be dismissed from the engagement. Our analysis is consistent with concerns expressed by the accounting profession that litigation pressures lead to the withdrawal of audit services for a segment of the market.
Author: Jayanthi Krishnan
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Litigation against auditors has increased dramatically in recent years. Auditors can offset litigation risk in a number of ways, including improved audit quality and planning, increases in audit fees and increases in the issuance of modified opinions. Auditors can also adjust their client portfolios by becoming more selective in their choice of new clients and by withdrawing from high-risk engagements. We test the hypothesis that litigation risk motivates auditor resignations by comparing resignation companies with two groups of client companies that dismissed their auditors: one matched with the resignation companies on industry and year, and the other matched on year alone. We find resignation companies differ from dismissal companies along dimensions that capture the probability of litigation: financial distress, variance of abnormal returns, auditor independence, tenure and a modified (particularly going-concern) opinion. We also construct a litigation proxy based on a prior litigation-prediction model and find that the proxy is positively associated with the probability that the auditor will resign rather than be dismissed from the engagement. Our analysis is consistent with concerns expressed by the accounting profession that litigation pressures lead to the withdrawal of audit services for a segment of the market.
Author: Sue Woolley Scholz
Publisher:
ISBN:
Category : Accountants
Languages : en
Pages : 169
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Author: Aloke Ghosh
Publisher:
ISBN:
Category :
Languages : en
Pages : 32
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Book Description
Although auditor litigation risk is considered as a leading explanation for auditor resignations, audit risk, and business risk might also trigger resignations. Auditor litigation risk is defined as the risk of the auditor being involved in a lawsuit, audit risk is defined as the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated, and, finally, business risk is defined as the risk associated with the client's survival and profitability. Because the three risk factors are not mutually exclusive, we examine their relevance and incremental importance using measures from the pre- and post-resignation periods. Using summary indices from the pre-resignation period, we find that all the three ex-ante risk indices are incrementally important for resignations, especially when the predecessor auditor is a Big 4 firm. Because the ex-ante risk factors are prone to measurement errors and are less likely to capture auditor's proprietary information about the client, we analyze data from the post-resignation period when the auditor's proprietary information is likely to become publicly known. We find that within a three-year period following an auditor's resignation, clients are more likely to: (1) be involved in class-action lawsuits (ex-post litigation risk), (2) have internal control problems (ex-post audit risk), and (3) to be delisted from a national stock exchange (ex-post business risk). Our research demonstrates that auditors consider all three risk factors, and not just litigation risk, in resignation decisions.
Author: Kannan Raghunandan
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ISBN:
Category :
Languages : en
Pages :
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This paper examines the market for audit services when the incumbent auditor of an SEC registrant has resigned from the engagement. While many previous studies of auditor changes have examined auditor dismissals by the client, only a few studies have specifically focused on auditor resignations. Auditor resignations constitute a unique setting because they may indicate increased likelihood of possible future losses to the new auditor, and provide an opportunity to test the demand-and-supply side incentives in the market for audit services.Results from analyses of 156 auditor resignations and a control sample of 375 auditor dismissals indicate that Big 6 firms were less likely to serve as the successor auditor when the predecessor has resigned, after controlling for three other factors identified as proxies for litigation risk to the auditor (client?s financial stress, industry membership and proportion of total assets in receivables and inventory). The effects were especially pronounced for the subset of resignees in financial stress. These results support suggestions that the implications of auditor resignations are different from auditor dismissals, and provide supporting evidence for the suggestions that supply-side incentives should be considered in examining the market for audit services.
Author: Kevin M. Raedy
Publisher:
ISBN:
Category :
Languages : en
Pages : 129
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Author: Paul A. Griffin
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Category :
Languages : en
Pages : 0
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This paper assesses the effects of auditor dismissals and resignations on audit fees and, in particular, whether companies pay more or less for their audits around these events. We also test the hypotheses that the fee discount around a dismissal can be explained by the benefits of auditor incumbency and the fee premium around a resignation varies in relation to the additional audit effort and litigation risk of the incoming auditor. We base our study on a comprehensive sample of audit fee disclosures made by SEC registrants during fiscal years 2000 to 2004, so that our study period includes auditor changes before and after the Sarbanes-Oxley (SOX) legislation. For dismissals, we find that not only does the successor auditor discount fees, and in a way that supports our discounting hypothesis, but also that fees are discounted one year before the auditor change by the incumbent auditor, consistent with the view that the threat of a dismissal may influence fees. For resignations, fees are higher one year before and after the event indicating that both the incumbent and incoming auditor charge a premium around a resignation, possibly because the new auditor needs to cope with greater than normal litigation risk and/or audit effort. SOX appears not to have affected discounting around a dismissal, but the fee premium around a resignation increases following the legislation, consistent with our resignation hypothesis. We also find that non-audit fees are discounted around a dismissal, and this result too appears to be unchanged by SOX.
Author: Jessica Camil Gabriel
Publisher:
ISBN:
Category :
Languages : en
Pages : 70
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Book Description
The purpose of this paper is to investigate the factors associated with the audi tor search period i.e. the number of days needed to appoint an auditor following incumbent auditor resignation or dismissal. Relying on prior research investiga ting the factors associated with auditor changes in general and client acceptanc e and client discontinuance in particular, we examine whether litigation risk is a primary determinant of the auditor search period. Our sample consists of more than 2700 auditor change cases that have occurred be tween 2000 and 2007 and we conclude that litigation risk is a major determinant of the auditor search period. The importance of litigation risk is evidenced by the significance of audit risk and financial risk factors found by the study as well as the significance of auditor resignations.
Author: Susan Zhan Shu
Publisher:
ISBN:
Category : Actions and defenses
Languages : en
Pages : 174
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Author: Lynn Barkess
Publisher:
ISBN:
Category : Auditors
Languages : en
Pages : 32
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Author: Jiahui Liang
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ISBN:
Category :
Languages : en
Pages : 29
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This paper studies the influence of conditional conservatism on the auditor resignations, and more importantly, the impact of corporate governance on this relationship. The existing literature has provided evidence on the existence and pervasiveness of accounting conservatism, such as compensation and debt contracts, shareholder litigation, taxation and accounting supervision. However, there is very limited evidence and discussion on the potential impact of accounting conservatism on audit risk and auditor resignation. Furthermore, research on how effective corporate governance affects the relationship is rarely covered.We select the firm-year observations from 2005 to 2015. We find that the conditional conservatism reduces the auditor resignations by reducing the expected audit risk. However, further empirical results show that this reduction in auditor resignations is attenuated by higher corporate governance quality. That is, effective corporate governance will moderate the negative correlation between conservatism and auditor resignations. The empirical results of this paper are of value to firms, auditors, regulators, standard-setters and corporate managers. In addition, this paper expands the literature on the influencing factors of auditor resignations.
