Common Auditors in Mergers and Acquisitions: The Impact on Post-Acquisition Financial Reporting Quality

59 Pages Posted: 28 May 2020

See all articles by Xi Ai

Xi Ai

University of Tennessee - Haslam College of Business

Andrew Doucet

University of Tennessee, Knoxville - Haslam College of Business

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Kathleen Schuchard

University of Tennessee, Knoxville

Date Written: April 30, 2020

Abstract

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

Ai, Xi and Doucet, Andrew and Myers, Linda A. and Schuchard, Kathleen, Common Auditors in Mergers and Acquisitions: The Impact on Post-Acquisition Financial Reporting Quality (April 30, 2020). Available at SSRN: https://ssrn.com/abstract=3589811 or http://dx.doi.org/10.2139/ssrn.3589811

Xi Ai

University of Tennessee - Haslam College of Business ( email )

453 Haslam Business Building
Knoxville, TN 37996-4140
United States

Andrew Doucet

University of Tennessee, Knoxville - Haslam College of Business ( email )

Haslam Business Building
Knoxville, TN
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Kathleen Schuchard

University of Tennessee, Knoxville ( email )

916 Volunteer Blvd
Knoxville, TN 37916
United States
8659741756 (Phone)

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