Auditor Resignations and the Market for Audit Services

Posted: 8 Jul 1999

See all articles by Kannan Raghunandan

Kannan Raghunandan

Florida International University (FIU) - School of Accounting

Dasaratha V. Rama

Florida International University (FIU)

Abstract

This paper examines the market for audit services when the incumbent auditor of an SEC registrant has resigned from the engagement. While many previous studies of auditor changes have examined auditor dismissals by the client, only a few studies have specifically focused on auditor resignations. Auditor resignations constitute a unique setting because they may indicate increased likelihood of possible future losses to the new auditor, and provide an opportunity to test the demand-and-supply side incentives in the market for audit services.

Results from analyses of 156 auditor resignations and a control sample of 375 auditor dismissals indicate that Big 6 firms were less likely to serve as the successor auditor when the predecessor has resigned, after controlling for three other factors identified as proxies for litigation risk to the auditor (client?s financial stress, industry membership and proportion of total assets in receivables and inventory). The effects were especially pronounced for the subset of resignees in financial stress. These results support suggestions that the implications of auditor resignations are different from auditor dismissals, and provide supporting evidence for the suggestions that supply-side incentives should be considered in examining the market for audit services.

JEL Classification: M49, L84

Suggested Citation

Raghunandan, Kannan and Rama, Dasaratha, Auditor Resignations and the Market for Audit Services. Available at SSRN: https://ssrn.com/abstract=165857

Kannan Raghunandan (Contact Author)

Florida International University (FIU) - School of Accounting ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
305-348-2582 (Phone)

Dasaratha Rama

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

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