Abstract

We examine the relationship between voluntary auditor changes and discretionary accruals. In particular, we investigate whether the voluntary auditor change increases discretionary accruals and performance－matched discretionary accruals, and hence, leads to higher reported earnings for non －finance firms during our sample period, 1991～2005. Firms tend to switch incumbent auditors to reduce audit fees, improve quality of financial reports, avoid auditor－client disagreement, or shop audit opinion. Especially, auditor changes are expected when firms have incentives in engaging earnings management while auditors have incentives to reduce earnings management. Therefore, we hypothesize that managers' earnings management behavior is one of the important reasons of auditor changes. To investigate our research hypothesis, we examine the relationship between voluntary auditor changes and discretionary accruals (Dechow et al. 1995) and performance－matched discretionary accruals (Kothari et al. 2005) using 12,763 firm－year observations during our sample period, 1991－2005. We divide the sample period into the 1991～2000 period and the 2001～2005 period because legal regimes are changed in 2001 in order to improve auditor independence. The sample period does not include year 2006 and after due to the mandatory auditor rotation rule implemented in 2006. In addition, we focus on firms with auditor changes between Big audit firms or between Non－big audit firms. Our empirical results show that the level or change of discretionary accruals and auditor changes are positively related during the sample period 1991～2000. However, we cannot find the similarly consistent results on the relationship during the sample period 2001－2005. It implies that firms are likely to change incumbent auditors to report higher reported earnings in 1991～2000 while firms do not do that in 2001～2005. Our results show the possibility that firms tend to changes incumbent auditors to reduce audit fees, improve quality of financial reports, avoid auditor－client disagreement, or shop audit opinion, etc., but not to manage earnings in 2001－2005.

Keywords

• Auditor change
• Reason of auditor change
• Discretionary accruals
• Performance－matched discretionary accruals

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