Frequent Auditor Switching and the Impact on Audit Quality

A newly published paper in Accounting Horizons highlights the implications of frequent auditor switching for the audit quality. The paper is particularly significant for regulators, practitioners, and academics to inform policy discussions, audit committee disclosure requirements, risk models, investment decisions, and future research on auditor switching.

Existing accounting research primarily focuses on single-instance auditor changes and discusses the causes and consequences of these changes. However, little is known about companies that frequently change auditors and how this behavior affects the audit market and audit quality.

Over the years, regulators and the accounting profession have made various attempts to tackle public concerns surrounding opinion shopping. These efforts include congressional hearings, new standards, and the introduction of disclosure requirements. The recent proposal of additional disclosures from audit committees regarding external auditor appointments is another step in this direction.

The paper supports these developments by showing that more frequent auditor switching is associated with lower audit quality, characterized by increased misstatements and larger abnormal accruals. Interestingly, higher internal and external monitoring, such as analyst coverage, can mitigate this negative effect. The research also indicates that companies engaging in frequent auditor switching experience worse outcomes compared to those that change auditors but do not frequently switch auditors. These findings suggest that a subset of companies resort to frequent auditor switching to obtain lenient financial reporting oversight.

Regulators can shape policies around these findings to reduce opinion shopping and enhance audit quality. The SEC can benefit from the study’s insights while considering increased disclosure requirements for audit committee-related matters. Audit professionals and public accounting firms can incorporate the frequency of auditor switching as a risk factor, while researchers can consider the frequency of auditor switching as a crucial component for future research on auditor changes.

You can find the study via the following link.