The Association between Auditor Changes and Reporting Lags

Abstract

This paper examines audit report lags and earnings announcement lags for a sample of firms that switched auditors. We investigate whether audit report and earnings announcement lags are associated with the timing of auditor changes in relation to firms' fiscal year-ends. It is hypothesized that firms which replace their auditor early (late) in the fiscal year do so for positive (negative) reasons and experience shorter (longer) reporting lags. Conflicts over reporting issues can be difficult to resolve and consequently lead to reporting delays. In other cases, clients may be more concerned about adhering to customary reporting practices or improving reporting timeliness. These are likely to be considerations in auditor realignment decisions and are predictably reflected in the timing of the auditor change. The empirical findings for both audit report and earnings announcement lags are consistent with the hypotheses. Despite the increase in reporting lags for late switchers, we observe a higher incidence of switching in the fourth quarter than in any other quarter. Additionally, we detect a higher percentage of losses and modified opinions for late switchers in the year of the auditor change, which is consistent with the negative circumstances hypothesis. However, we find no evidence of a significant market reaction to announcements of early or late auditor changes. Given the importance of timely reporting, the findings suggest that the timing of an auditor change can convey distinct benefits or costs to switching firms, as measured by its effect on reporting lags. These findings also suggest that additional monitoring of auditor changes occurring around firms' fiscal year-ends can be beneficial because of their potentially negative antecedents and consequences.

JEL Classification: M41, M49