Audit Fees Around Dismissals and Resignations: Additional Evidence

Abstract:     
This paper offers new findings about how audit fees vary around auditor dismissals and resignations. For dismissals, we find evidence of lower than normal fees before and after an auditor change, consistent with the view that both incumbent and successor auditors adjust fees downward to retain the client. Our evidence also shows that incumbent and successor auditors charge unusually high fees before and after a resignation. We interpret the higher than normal incumbent fees as an indication that resignation companies reflect unusual levels of audit effort or risk, which the incumbent auditor captures as additional fees. Eventually, however, the additional fees are insufficient, inducing the incumbent to resign. A fee premium by the successor auditor after resignation also supports this view.

Keywords: Dismissals, Resignations, Audit Fees, Incumbent Auditor Fee Adjustments, Event Study

JEL Classification: C30, K22, L80, M40, M41

Accepted Paper Series