The Effect of Lame Duck Auditors on Management Discretion: An Empirical Analysis

2016. Auditing: A Journal of Practice and Theory 35 (3): 51-73.

Posted: 9 Nov 2011 Last revised: 1 Mar 2017

See all articles by Cory A. Cassell

Cory A. Cassell

University of Arkansas

Linda A. Myers

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

Timothy A. Seidel

Brigham Young University

Jian Zhou

University of Hawaii at Manoa

Date Written: November 1, 2015

Abstract

We identify instances in which the auditor-client relationship has been terminated but the auditor continues to complete a subsequent quarterly review. We refer to these instances as “lame duck auditor” quarters, and we contrast financial reporting quality in these quarters with that in non-lame duck auditor quarters. Using discretionary accruals and financial statement misstatements as proxies for financial reporting quality, we find that financial reporting quality is higher in lame duck auditor situations, suggesting that lame duck auditors perform more stringent quarterly reviews. We attribute these results to improvements in auditor independence and/or heighted reputation concerns. We perform a number of tests to alleviate concerns that our results are attributable to fundamental differences between clients with lame duck auditors and clients with non-lame duck auditors and to alleviate concerns that our results are attributable to changes in manager behavior rather than changes in auditor behavior. Collectively, our results provide insights that are relevant to regulators, auditors, and other stakeholders who are interested in the factors that affect auditor independence and financial reporting quality.

Keywords: auditor independence, earnings management, discretionary accruals, management discretion, mandatory auditor rotation

JEL Classification: M40

Suggested Citation

Cassell, Cory A. and Myers, Linda A. and Seidel, Timothy A. and Zhou, Jian, The Effect of Lame Duck Auditors on Management Discretion: An Empirical Analysis (November 1, 2015). 2016. Auditing: A Journal of Practice and Theory 35 (3): 51-73.. Available at SSRN: https://ssrn.com/abstract=1957323 or http://dx.doi.org/10.2139/ssrn.1957323

Cory A. Cassell

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Linda A. Myers (Contact Author)

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

Knoxville, TN
United States

Timothy A. Seidel

Brigham Young University ( email )

Provo, UT 84602
United States

Jian Zhou

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

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