Opaque Auditor Dismissal Disclosures: What Does Timing Reveal that Disclosures Do Not?

Posted: 9 Jun 2017 Last revised: 10 Dec 2021

Date Written: October 1, 2017

Abstract

Auditor resignations provide a clear signal of accounting problems or heightened audit risk; however, registrants label the vast majority of auditor changes as dismissals, which carry more ambiguity. Motivated by the opacity of current dismissal disclosures, this study explores the usefulness of these disclosures compared to an alternative signal – the timing of the dismissal within the reporting year – for inferring the causes and implications of dismissals. Dividing the reporting year into key periods, we find that the probabilities of future restatements, material weaknesses, and delistings following a dismissal generally increase within the reporting year while negative circumstances disclosed do not. Analyses suggest that the timing patterns are caused by burgeoning, yet undisclosed, conflicts between the client and the outgoing auditor, rather than by transition difficulties involving the new auditor (as prior literature claims). The timing patterns strongly persist after controlling for negative circumstances that registrants disclose in the dismissal filing, suggesting that the disclosures are not fully revealing. In fact, disclosed negative circumstances have no incremental predictive power for future restatements and delistings. Our results suggest a severe lack of informativeness of current disclosures and support previous calls for improvement of dismissal disclosure regulation.

Paper is available at: https://www.sciencedirect.com/science/article/pii/S0278425421000880

Note: This study was formerly entitled, "Auditor Dismissals: Opaque Disclosures and the Light of Timing".

Keywords: auditor dismissal, auditor resignation, restatement, material weakness, delisting

JEL Classification: M40, M41, M42, M48

Suggested Citation

Burks, Jeffrey J. and Sustersic Stevens, Jennifer, Opaque Auditor Dismissal Disclosures: What Does Timing Reveal that Disclosures Do Not? (October 1, 2017). Journal of Accounting and Public Policy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2983218 or http://dx.doi.org/10.2139/ssrn.2983218

Jeffrey J. Burks (Contact Author)

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Jennifer Sustersic Stevens

Ohio University ( email )

College of Business Administration
526 Copeland Hall
Athens, OH 45701
United States

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