Client Characteristics, Abnormal Accruals, and Auditor Switches: An Empirical Study

Posted: 16 Jul 2003

See all articles by Ho Young Lee

Ho Young Lee

University of Nebraska at Omaha - Department of Accounting

Terry O'Keefe

University of Queensland - Accounting and Accountability; University of Oregon - Department of Accounting

Michael T. Stein

Old Dominion University

Abstract

This paper investigates the associations among client characteristics, abnormal accruals, and auditor switches. Working within a framework that categorizes switches as resulting from auditor-client realignments, disagreements over accounting decisions, or dissatisfaction with auditor/client service quality we find that auditor switches are associated with smaller, higher risk clients. Several other factors such as the issuance of securities and the existence of a modified opinion also increase the probability of an auditor switch. Notably, we do not replicate prior findings by DeFond and Subramanyam (1998) that clients with negative prior year abnormal accruals are more likely to switch auditors, once other controls are in place. Further, our evidence suggests that clients that switch auditors move closer to the industry norm abnormal accrual in the subsequent period than non-switching clients, regardless of the sign of the prior period abnormal accrual. This result differs from D&S who report larger income increasing abnormal accruals for switchers. In general, we find that abnormal accruals add little explanatory power to models of auditor switching in our sample.

Keywords: auditor switching, client risk, opinion shopping, discretionary accruals

JEL Classification: M49, M41, M43

Suggested Citation

Lee, Ho Young and O'Keefe, Terry and Stein, Michael T., Client Characteristics, Abnormal Accruals, and Auditor Switches: An Empirical Study. Available at SSRN: https://ssrn.com/abstract=416603

Ho Young Lee

University of Nebraska at Omaha - Department of Accounting ( email )

College of Business Administration
60th and Dodge Streets
Omaha, NE 68182
United States
402-554-2608 (Phone)
402-554-3747 (Fax)

HOME PAGE: http://cba.unomaha.edu/faculty/hylee/WEB/home.html

Terry O'Keefe

University of Queensland - Accounting and Accountability ( email )

Brisbane 4072, Queensland
Australia

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

Michael T. Stein (Contact Author)

Old Dominion University ( email )

Strome College of Business
Norfolk, VA VA 23529
United States
17576835495 (Phone)

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