The Effect of Corporate Governance on Auditor-Client Realignments

Posted: 20 Dec 2006 Last revised: 23 May 2012

See all articles by Cory A. Cassell

Cory A. Cassell

University of Arkansas

Gary Giroux

Texas A&M University - Department of Accounting

Linda A. Myers

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

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Date Written: December 5, 2011

Abstract

Events leading up to the implementation of the Sarbanes-Oxley Act of 2002 (SOX) increased the public’s focus on corporate governance and increased regulatory scrutiny of corporate governance mechanisms. These events also contributed to a massive restructuring in the audit market which resulted in the transfer of a large number of clients from Big N to non-Big N audit firms. We extend prior research examining the determinants of auditor-client realignments by investigating the effect of corporate governance on downward (i.e., from Big N to non-Big N auditors) switching activity. We develop a corporate governance index comprised of governance characteristics that we expect auditors to find more desirable in their clients (specifically, board and audit committee independence, diligence, and expertise). The results suggest that Big N auditors consider client corporate governance mechanisms when making client portfolio decisions. Specifically, downward auditor-client realignments are more likely for clients that score lower on our corporate governance index. However, the influence of audit committee-related corporate governance components on downward auditor-client realignments decreased post-SOX. The reduced effect of audit committee-related corporate governance components is consistent with what would be expected if the audit committee-related rules imposed by SOX reduced the variation in audit committee quality across clients.

Keywords: Corporate governance, Auditor-client realignments, Audit risk, Financial risk, Litigation risk, Earnings manipulation risk, Discretionary accruals, Sarbanes-Oxley Act of 2002

JEL Classification: G38, G34, M41, M43, M49, K22

Suggested Citation

Cassell, Cory A. and Giroux, Gary A. and Myers, Linda A. and Omer, Thomas C., The Effect of Corporate Governance on Auditor-Client Realignments (December 5, 2011). Auditing: A Journal of Practice & Theory 31 (2), 2012 . Available at SSRN: https://ssrn.com/abstract=1371486

Cory A. Cassell

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Gary A. Giroux

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Linda A. Myers (Contact Author)

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

Knoxville, TN
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

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