Auditor Fees Around Dismissals and Resignations: Additional Evidence

50 Pages Posted: 29 Apr 2008

See all articles by Paul A. Griffin

Paul A. Griffin

University of California, Davis - Graduate School of Management; University of California, Davis

David H. Lont

University of Otago - Department of Accountancy and Finance

Date Written: April 30, 2008

Abstract

This paper offers new findings on the relation between auditor dismissals and resignations and audit fees. Unlike the prior research, which studies the fees of auditors after an auditor change, we focus on audit fees before an auditor change. Our evidence shows that incumbent auditors charge unusually higher fees at least one year prior to an auditor change event. The existence of unusual fee adjustments by incumbents may serve as a precursor of such events.

In the case of dismissals, we reason that if clients perceive the presence of unusually higher audit fees as an indication that their costs are excessive, this should prompt a switch in auditors. We find evidence consistent with this view. For resignations, we interpret unusually higher incumbent fees not as a sign of client-perceived excess but as a signal by auditors that resignation companies reflect higher levels of audit risk or liability, which incumbents capture as additional fees. Eventually, however, the additional fees are insufficient, and the auditor resigns.

While our results are based mostly on the audit fee disclosures after Sarbanes-Oxley, we control for and find similar results for periods not dominated by the legislation. Our results are similar for each of the Big 4 firms.

Keywords: Dismissals, Resignations, Audit fees, Incumbent auditor fee adjustments

JEL Classification: C30, G38, K22, L84, M41, M49

Suggested Citation

Griffin, Paul A. and Lont, David H., Auditor Fees Around Dismissals and Resignations: Additional Evidence (April 30, 2008). Available at SSRN: https://ssrn.com/abstract=1126855 or http://dx.doi.org/10.2139/ssrn.1126855

Paul A. Griffin (Contact Author)

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/

University of California, Davis ( 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

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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