Auditor Responses to Shareholder Activism

Posted: 21 Jun 2018 Last revised: 6 Feb 2021

See all articles by Feng Guo

Feng Guo

Iowa State University - Department of Accounting and Finance

Chenxi Lin

University of Oklahoma

Adi Masli

University of Kansas - School of Business

Michael S. Wilkins

University of Kansas

Multiple version iconThere are 2 versions of this paper

Date Written: June 5, 2020

Abstract

This paper investigates how auditors respond to shareholder activism against their clients. We find that activism targets pay higher audit fees and also are more likely to receive adverse internal control opinions and first-time going concern opinions. Our results suggest that the increased public scrutiny associated with activism campaigns encourages auditors to increase effort and become more concerned about reputational damage and litigation risk. Consistent with this notion, we find that activism targets are more likely to experience accounting-related lawsuits. In additional tests, we find that the increased likelihood of unfavorable internal control opinions reflects increased auditor diligence (i.e, higher quality reporting) rather than purely reflecting increased auditor conservatism. Overall, the results of this paper identify a number of relationships that should be viewed as important by activists, target firms, and auditors.

Keywords: shareholder activism, going concern opinions, internal controls, audit fees, litigation risk

Suggested Citation

Guo, Feng and Lin, Chenxi and Masli, Adi and Wilkins, Michael S., Auditor Responses to Shareholder Activism (June 5, 2020). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3191253 or http://dx.doi.org/10.2139/ssrn.3191253

Feng Guo

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

Chenxi Lin

University of Oklahoma ( email )

Norman, OK 73019-4004
United States

Adi Masli

University of Kansas - School of Business ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

Michael S. Wilkins (Contact Author)

University of Kansas ( email )

Capitol Federal Hall
1654 Naismith Dr.
Lawrence, KS 66045
United States

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