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The Effects of Auditor Dismissals and Resignations on Audit Fees: Evidence Based on SEC Disclosures Under Sarbanes-Oxley


Paul A. Griffin


University of California, Davis - Graduate School of Management

David H. Lont


University of Otago - Department of Accountancy and Finance

February 16, 2005


Abstract:     
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.

Number of Pages in PDF File: 60

Keywords: Auditor dismissal, auditor resignation, audit fees, SEC disclosures, Sarbanes-Oxley

JEL Classification: C30, G38, K22, L80, M40, M41, M49

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Date posted: February 21, 2005  

Suggested Citation

Griffin, Paul A. and Lont, David H., The Effects of Auditor Dismissals and Resignations on Audit Fees: Evidence Based on SEC Disclosures Under Sarbanes-Oxley (February 16, 2005). Available at SSRN: http://ssrn.com/abstract=669682 or http://dx.doi.org/10.2139/ssrn.669682

Contact Information

Paul A. Griffin
University of California, Davis - Graduate School of Management ( email )
3102 Gallahger Hall
Davis, CA 95616
United States
(530) 752-7372 (Phone)
(425) 799-4143 (Fax)
HOME PAGE: http://www.gsm.ucdavis.edu/griffin/

David H. Lont (Contact Author)
University of Otago - Department of Accountancy and Finance ( email )
Box 56
Dunedin, Otago 9054
New Zealand
+64 3 479 8119 (Phone)
+64 3 479 8171 (Fax)
HOME PAGE: http://www.business.otago.ac.nz/acty/
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