Common Auditors in Mergers and Acquisitions: The Impact on Post-Acquisition Financial Reporting Quality
59 Pages Posted: 28 May 2020
Date Written: April 30, 2020
Prior research documents improvements in pre-acquisition outcomes when acquirer and target firms engage the same audit firm to perform their financial statement audits. We examine whether the advantages of engaging a common auditor prior to an acquisition translate into improved post-acquisition outcomes. We find that common auditors improve post-acquisition financial reporting quality as evidenced by a decreased likelihood of misstatement and of missed internal control material weaknesses following an acquisition. These benefits are attributable to same-office common auditors rather than common auditors from different audit offices. We also find that the effects of common auditors are more pronounced when the acquisition is more material to the acquirer and when the time between acquisition completion and the combined entity’s year-end is shorter. Finally, we find that common auditors are associated with lower non-audit service fees. Our findings suggest that common auditors, especially same-office common auditors, provide important post-acquisition benefits.
Keywords: Common Auditors; Financial Reporting Quality; Financial Statement Misstatements; Mergers and Acquisitions
JEL Classification: M40; M41
Suggested Citation: Suggested Citation