Auditor Selection Following Auditor Turnover: Do Peers’ Choices Matter?

51 Pages Posted: 17 May 2015 Last revised: 24 Mar 2017

See all articles by Xudong (Daniel) Li

Xudong (Daniel) Li

Monmouth University - Department of Accounting

Lili Sun

University of North Texas - Department of Accounting

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Date Written: March 21, 2017

Abstract

Drawing on social norms and social learning theories, this study investigates the influences of peer (similar) firms’ prior choices on whether or not a client chooses to affiliate with a “social norm” audit office in its metropolitan area, following auditor turnover. The office in a metro area auditing the largest number of peer firms along a given similarity dimension is considered to be the social norm office for that dimension. We identify peer firms using four alternative dimensions of similarity: client geographic location, industry affiliation, client size (filing status), and departing auditor type (Big N versus non-Big N). Using a large sample of auditor changes from the years 2001 to 2012, we find that for every dimension of similarity, the propensity of a client to select a norm (as opposed to a non-norm) audit office as the succeeding auditor is positively associated with 1) the proportion of its peers audited by the “norm” office in the prior year (i.e., social norm evidence) and 2) the proportion of its auditor-switching peers selecting a “norm” audit office in the prior year (i.e. social learning evidence). Social norm and social learning evidence provided by “more similar” peers has greater effect than evidence provided by “less similar” peers across all four dimensions of peer similarity. Further analysis suggests that social norm and learning evidence has incremental power (beyond each other) in explaining auditor selection, with norm evidence exhibiting a larger effect than learning evidence. Additional analysis of SOX 404(b) internal control audit provides an example disruption in the social norm for the client size dimension of similarity.

Keywords: Auditor choice; Audit office; Auditor turnover; Experience good; Metro audit market; Peer choice; Social norm; Social learning

Suggested Citation

Li, Xudong (Daniel) and Sun, Lili and Ettredge, Michael L., Auditor Selection Following Auditor Turnover: Do Peers’ Choices Matter? (March 21, 2017). Accounting, Organizations and Society, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2606655 or http://dx.doi.org/10.2139/ssrn.2606655

Xudong (Daniel) Li

Monmouth University - Department of Accounting ( email )

West Long Branch, NJ 07764
United States

Lili Sun

University of North Texas - Department of Accounting ( email )

1155 Union Circle #305219
Denton, TX 76203-5017
United States
940-565-3077 (Phone)

Michael L. Ettredge (Contact Author)

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

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