Former Audit Partners and Abnormal Accruals

Posted: 14 Apr 2004

See all articles by Krishnagopal Menon

Krishnagopal Menon

Boston University - Department of Accounting

David D. Williams

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Abstract

Audit clients often employ a former partner of their present auditor as an officer or a director. This "revolving door" practice presents a potential threat to auditor independence. Using the Jones (1991) model to calculate abnormal accruals for firms in 1998 and 1999, we find that firms employing former partners as officers or directors report larger signed and unsigned abnormal accruals than other firms, after controlling for other factors that plausibly affect abnormal accruals. To ensure that the results are not driven by performance characteristics of the former partner firms, we construct a performance-matched control sample and obtain consistent results. We also observe a disproportionately higher (lower) proportion of former partner firms than expected just meeting (missing) analysts' earnings forecasts.

Keywords: Auditor independence, abnormal accruals, former partners

JEL Classification: M49, G34, G29

Suggested Citation

Menon, Krishnagopal and Williams, David D., Former Audit Partners and Abnormal Accruals. Accounting Review, October 2004. Available at SSRN: https://ssrn.com/abstract=529762

Krishnagopal Menon

Boston University - Department of Accounting ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-2661 (Phone)
617-353-6667 (Fax)

David D. Williams (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States
614-292-8566 (Phone)

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