Auditor Responses to Shareholder Activism

Posted: 17 Aug 2020

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 24, 2020

Abstract

In this paper, we investigate how auditors respond to shareholder activism against their clients. Our study is important because activism may be viewed by auditors as a source of increased engagement risk, thereby impacting audit outcomes. The potential relationship between shareholder activism and audit outcomes leads us to predict that activism targets will pay higher audit fees and also will be more likely to receive adverse internal control opinions and first‐time going concern opinions. Our results, which support all three predictions, suggest that the public scrutiny associated with activism campaigns heightens auditors’ concerns about reputational damage and litigation risk. Consistent with this notion, we find that activism targets are more likely to experience accounting‐related lawsuits. We also find that the increased likelihood of adverse internal control opinions documented in our baseline tests reflects higher quality reporting rather than increased auditor conservatism. Overall, our findings suggest that activism campaigns spur auditor diligence while also increasing the possibility of negative outcomes that may not be fully anticipated by activist investors.

Keywords: Shareholder Activism, audit fees, Internal controls, going concern, engagement risk

Suggested Citation

Guo, Feng and Lin, Chenxi and Masli, Adi and Wilkins, Michael S., Auditor Responses to Shareholder Activism (June 24, 2020). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3652358

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
641
PlumX Metrics