The Tendency of Auditor Selection AfterAudit Firm Dissolution
Asian Tax Journal Vol. 8 No. 3 (2007), pp. 113-142
Abstract
Two audit firms(Chungwoon and Sandong) were heavily sanctioned because of the severe audit failure and were eventually dissolved. Choi and Nah(2004) reported that the clients of the two audit firms experienced significantly negative stock price reactions surrounding dates on which adverse news about the audit quality and possible sanctions were released. This evidence indicates the effects of the audit quality on the firm value. Since two audit firms were dissolved, the clients had to select new auditors. We extend Choi and Nah(2004) by investigating the relationship between the magnitude of the negative stock price reactions and the quality of the new auditor. We propose that the more negative stock price reaction the clients experienced, the more likely the clients selected a high quality auditor. Thus, Our hypothesis is that the magnitude of stock price reactions are negatively correlated with the auditor quality.Empirical results do not support out hypothesis. The quality of successive auditors selected by the clients of two audit firms were not higher on average than that of successive auditor selected by the client of other audit firm at the same time. One possible reason for this result is that in Koran audit market, the auditor selection is made based on personal relationship. However, when we control for the firm size effects for the Sandong's clients, there is a tendency of choosing high quality auditors. <Key words> Audit Failure, Audit Firm Dissolution, Stock Price Reaction, Auditor Change
Keywords
- Audit Failure
- Audit Firm Dissolution
- Stock Price Reaction
- Auditor Change
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