Recent Auditor Downgrade Activity and Changes in Clients’ Discretionary Accruals

Posted: 30 Jan 2011 Last revised: 22 Aug 2011

See all articles by Brian Todd Carver

Brian Todd Carver

Clemson University - School of Accountancy & Legal Studies

Carl W. Hollingsworth

Clemson University

Jonathan D. Stanley

Auburn University - School of Accountancy

Date Written: November 19, 2010

Abstract

This study examines whether recent auditor downgrade activity is associated with subsequent changes in clients’ discretionary accruals. The market for audit services has undergone dramatic change in recent years, resulting in a substantial increase in the number of clients realigning to smaller auditors. This shift in the audit market raises concern about the potential adverse effects of clients moving away from larger, and perhaps more effective, auditors. Consistent with this concern, our analysis of auditor switches occurring between 2003 and 2005 indicates that downgrade clients reported a significant increase in signed discretionary accruals over the two years following the switch. In contrast, we find no significant change in discretionary accruals for a control sample of lateral switches. However, between-sample comparisons fail to provide consistent evidence that the two groups reported accrual changes differently following the auditor switch.

Keywords: Audit Quality, Auditor Switches, Discretionary Accruals, Financial Reporting Quality

Suggested Citation

Carver, Brian Todd and Hollingsworth, Carl W. and Stanley, Jonathan D., Recent Auditor Downgrade Activity and Changes in Clients’ Discretionary Accruals (November 19, 2010). Auditing: A Journal of Practice & Theory, Vol. 30, No. 3, 2011, Available at SSRN: https://ssrn.com/abstract=1750585

Brian Todd Carver

Clemson University - School of Accountancy & Legal Studies ( email )

Clemson, SC 29634
United States

Carl W. Hollingsworth

Clemson University ( email )

101 Sikes Ave
Clemson, SC 29634
United States

Jonathan D. Stanley (Contact Author)

Auburn University - School of Accountancy ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States

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