Common Auditors in Mergers and Acquisitions: The Impact on Post-Acquisition Financial Reporting Quality and Audit Fees

67 Pages Posted: 28 May 2020 Last revised: 19 Jul 2023

See all articles by Xi Ai

Xi Ai

University of Louisville

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management

Date Written: January 1, 2022

Abstract

Prior research documents that mergers and acquisitions (M&As) result in significant risks to financial reporting. One potential solution to combat the risk of misreporting following M&As is to engage auditors who have pre-acquisition experience with the acquirer and target. In this paper, we examine whether the advantages of engaging a common auditor prior to an acquisition translate into improvements in post-acquisition financial reporting quality and reduced audit fees. We find that same-office, but not different-office, common auditors improve post-acquisition financial reporting quality, as evidenced by a decreased likelihood of misstatement, lower F-Score, and a lower likelihood of a missed internal control material weakness. We also find that engaging same-office common auditors is associated with a lower percentage change in audit fees. In additional tests, we find that the effects of same-office common auditors is robust to limiting the sample to acquirers with multiple acquisitions and limiting the sample to acquirers and targets with no auditor switches in the prior three years. Together, our findings suggest that engaging a same-office common auditors facilitates knowledge-transfer about the target and provides important post-acquisition benefits.

Keywords: common auditors; same-office common auditors; financial reporting quality; financial statement misstatements; mergers and acquisitions; audit fees

JEL Classification: M40; M41

Suggested Citation

Ai, Xi and Myers, Linda A. and Schmardebeck, Roy, Common Auditors in Mergers and Acquisitions: The Impact on Post-Acquisition Financial Reporting Quality and Audit Fees (January 1, 2022). Available at SSRN: https://ssrn.com/abstract=3589811 or http://dx.doi.org/10.2139/ssrn.3589811

Xi Ai

University of Louisville ( email )

College of Business
Room 246
Louisville, KY 40205
United States
(502)852-4822 (Phone)

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN 37996
United States

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