Determinants and market consequences of auditor dismissals after accounting restatements

Karen M. Hennes, Andrew Leone, Brian P. Miller

Research output: Contribution to journalArticle

55 Citations (Scopus)

Abstract

This study examines the conditions under which financial restatements lead corporate boards to dismiss external auditors and how the market responds to those dismissal announcements. We find that auditors are more likely to be dismissed after more severe restatements but that the severity effect is primarily attributable to the dismissal of non-Big 4 auditors rather than Big 4 auditors. We also document that among corporations with Big 4 auditors, those that are larger and more complex operationally are less likely to dismiss their auditors. Combined, this evidence suggests that firms with higher switching costs and fewer replacement auditor choices are less likely to dismiss their auditors after a restatement, which is informative to the debates about the costs and benefits of mandatory auditor rotation and limited competition in the audit market. Additionally, we examine contemporaneous executive turnover and find evidence that boards view auditor dismissals as complementary rather than substitute responses to restatements. Finally, we investigate the market reaction to auditor dismissals after restatements. The market reaction to the dismissal is significantly more positive following more severe restatements (5.9 percent) relative to less severe restatements (0.6 percent) when the client engages a comparably sized auditor. This positive market reaction is consistent with firms restoring financial reporting credibility by replacing their auditors and highlights the important role that auditors play in the financial markets.

Original languageEnglish (US)
Pages (from-to)1051-1082
Number of pages32
JournalAccounting Review
Volume89
Issue number3
DOIs
StatePublished - 2014

Fingerprint

Auditors
Accounting restatements
Restatements
Market reaction
Big 4
Corporate boards
External auditor
Substitute
Financial markets
Severity
Executive turnover
Costs and benefits
Audit market
Switching costs
Replacement
Financial reporting credibility
Announcement
Auditor choice
Financial restatements

Keywords

  • Auditor dismissals
  • Corporate governance
  • Restatements

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

Determinants and market consequences of auditor dismissals after accounting restatements. / Hennes, Karen M.; Leone, Andrew; Miller, Brian P.

In: Accounting Review, Vol. 89, No. 3, 2014, p. 1051-1082.

Research output: Contribution to journalArticle

Hennes, Karen M. ; Leone, Andrew ; Miller, Brian P. / Determinants and market consequences of auditor dismissals after accounting restatements. In: Accounting Review. 2014 ; Vol. 89, No. 3. pp. 1051-1082.
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