Auditor Realignments Accompanying Implementation of SOX 404 ICFR Reporting Requirements

39 Pages Posted: 13 Jan 2006 Last revised: 22 Sep 2010

See all articles by Michael Ettredge

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Jim Heintz

University of Kansas

Chan Li

University of Kansas

Susan Scholz

University of Kansas - Accounting and Information Systems Area

Date Written: September 29, 2010

Abstract

We examine the impact of adverse auditors’ opinions on clients’ internal control over financial reporting (ICFR), issued under SOX Section 404, on auditor dismissals. Companies receiving adverse ICFR opinions are more likely to subsequently dismiss their auditors. This association between adverse reports and dismissals persists over a four year period beginning with the initial year of SOX 404 reporting. Our evidence also suggests that these dismissals tend to be part of clients’ efforts to improve their overall financial reporting. Clients receiving adverse reports are more likely to switch to higher quality auditors, as proxied by Big 4 membership and two measures of industry specialization, than are clients receiving favorable reports. Further, adverse opinion clients that dismiss auditors and then hire new auditors that specialize in the client’s industry are more likely to receive an improved ICFR report in the next year.

Keywords: Auditor Realignments, Dismissals, Internal Control, SOX Section 404, Remediation

JEL Classification: M42, M41, M49, G38

Suggested Citation

Ettredge, Michael L. and Heintz, James and Li, Chan and Scholz, Susan, Auditor Realignments Accompanying Implementation of SOX 404 ICFR Reporting Requirements (September 29, 2010). Available at SSRN: https://ssrn.com/abstract=874836 or http://dx.doi.org/10.2139/ssrn.874836

Michael L. Ettredge (Contact Author)

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

James Heintz

University of Kansas ( email )

1415
Lawrence, KS 66045
1-785-864-4568 (Phone)
1-785-864-5328 (Fax)

Chan Li

University of Kansas ( email )

Capitol Federal Hall
Lawrence, KS 66045
United States
7857661277 (Phone)
66045 (Fax)

Susan Scholz

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Ave
Lawrence, KS 66045
United States
785-864-7554 (Phone)
785-864-5328 (Fax)

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