Audit firm characteristics and auditor switching

Abstract

This study examines whether and how audit firm characteristics are associated with auditor switching and the ways in which the capital market perceives the differences in attributes between predecessor and successor auditors. To develop measures for the characteristics of each audit firm, I identify three audit outcomes – audit fees, going-concern opinions, and restatements – and introduce auditor fixed effects research design. Consistent with my expectations, I find that auditor characteristics are significant determinants of auditor switching, and client firms are more likely to change auditors when auditors have a larger tendency to 1) charge higher audit fees, 2) issue more going-concern opinions, and 3) have more restatements. Then, for the client firms who change auditors, I find that auditor switches tend to be made to the ones who have a low tendency for each of these matters. Further, I find that the market reacts favorably to the auditor switches that incorporate a large potential of audit fee reduction and the ones which increase auditor conservatism.