The Impact of Downward Auditor Changes on Information Risk for Non-Accelerated Filers
49 Pages Posted: 2 Feb 2015
Date Written: January 31, 2015
In this study, we examine the impact of changes in auditor quality on financial reporting information risk, particularly for smaller public companies (non-accelerated filers). Non-accelerated filers represent a large share of public reporting companies (over 60% in 2009), and given opportunity to grow, can create new jobs, providing incentives for recent efforts to exempt or scale back costly regulations. The regulatory easing has created lower disclosure and audit requirements for smaller public companies (non-accelerated filers) compared to larger public companies (accelerated filers). The demise of Arthur Andersen and increased attestation requirements for larger public companies has caused a dramatic decrease in Big 4 audits of smaller public companies. A downward auditor change (from a Big 4 to lower tier auditor) provides the setting to examine the extent to which auditor quality (proxied by auditor size) attenuates or mitigates non-accelerated filer information risk, as measured by stock return synchronicity. Contrary to our expectations, we find that non-accelerated filers have lower information risk in the period following downward auditor changes from Big 4 auditors compared to a matched sample of non-accelerated filers that continue to retain Big 4 auditors. This result also applies when the comparison group is a sample of accelerated filers that change from Big 4 auditors. The results are particularly salient for downward changes to Tier 2 auditors. Our study adds to the literature on audit quality and should be of interest to investors, researchers, and regulators.
Keywords: Auditor changes, auditor quality, information risk, non-accelerated filers
JEL Classification: M4
Suggested Citation: Suggested Citation