Auditor Dismissals: Opaque Disclosures and the Light of Timing
50 Pages Posted: 9 Jun 2017 Last revised: 12 Oct 2017
Date Written: October 2017
Motivated by the ambiguity of auditor dismissals, this study informs about an alternative signal – the timing of the dismissal – for inferring the implications of dismissals. When dividing the reporting year into five dismissal periods, we find largely monotonic increases in the probability of future restatements, material weaknesses, and delistings across the five periods. Firms that dismiss auditors after the second fiscal quarter have markedly higher rates of future restatements, material weaknesses, and delistings compared to firms that dismiss auditors shortly after filing the prior year’s 10-K. Incremental to other predictors, the period of dismissal has predictive power for restatements and material weaknesses but not for delistings. In contrast, mandatory disclosures about the circumstances of dismissals have little incremental predictive power. Stock price drifts following the mandatory disclosures indicate that the market tends to underreact to them.
Keywords: auditor dismissal, auditor resignation, restatement, material weakness, delisting
JEL Classification: M40, M41, M42, M48
Suggested Citation: Suggested Citation