Auditor Commitment and Turnover Intentions Following Negative Inspection Findings: The Effects of Regulator Enforcement Style and Firm Response

Abstract

SUMMARY We examine the effect of the regulator's style (critical versus supportive) when enforcing negative inspection findings and the audit firm's response to those findings (increase or decrease audit process structure) on auditor professional and firm commitment and turnover intentions. We find no evidence that enforcement style impacts professional commitment, but that auditors are more inclined to leave the profession when the regulator adopts a critical enforcement style and when their firm increases audit process structure. We further find that firm commitment is lower when the firm increases audit process structure, and that this is most pronounced when the regulator adopts a supportive enforcement style. We find no evidence of firm turnover intentions being impacted by either enforcement style or firm response. Recognizing the importance of retaining competent and motivated auditors, our results highlight the care needed, and alternatives available, when regulators enforce, and firms respond to, negative inspection findings. Data Availability: Data are available from the authors upon request. JEL Classification: M42.

Effects of regulatory enforcement style and audit firm remedial actions on investors' perceptions of audit quality

“…Third, news release is one common mean by which non‐professional investors not directly engaged with the regulator and the audit firm come to understand regulatory enforcement style and firm responses (Dee et al, 2011; Martinow et al, 2020). In response, audit firms will seek to strategize and manage their reputational assets through their news releases in order to be perceived more favourably by non‐professional investors (Dee et al, 2011).…”

“…Consequently, it follows that for regulators adopting a critical enforcement style, compliance effectiveness may be lower. Moreover, extant research shows that a critical enforcement style can hinder the development of trust between regulators and audit firms, arouse hostility, and impair cooperation (Ege et al, 2020; Martinow et al, 2020; May & Winter, 2011). In a recent study, Martinow et al (2020) show that a critical enforcement style leads to higher professional turnover intention, and this can adversely affect audit quality.…”

“…Moreover, extant research shows that a critical enforcement style can hinder the development of trust between regulators and audit firms, arouse hostility, and impair cooperation (Ege et al, 2020; Martinow et al, 2020; May & Winter, 2011). In a recent study, Martinow et al (2020) show that a critical enforcement style leads to higher professional turnover intention, and this can adversely affect audit quality. Meanwhile, Ege et al (2020) highlight that some partners they interviewed believe that the PCAOB was overly eager to criticize the firms and adopted a negative tone in the inspection reports, and they believe that this regulatory enforcement style can adversely affect the interactions between the firms and the PCAOB, raising concerns of disregard from the latter.…”

“…Ege et al (2020) highlight that audit regulators consider their enforcement styles and adopt persuasion strategies rather than penalties in their initial response to non‐compliance. Martinow et al (2020) further show that auditors have higher turnover intention when the regulators adopt a critical rather than a supportive enforcement style. Motivated by the recent debate about the benefits of regulatory enforcement style in audit practice (Johnson et al, 2019; Westermann et al, 2019), how regulatory enforcement styles influence investors' perceptions of audit quality remains an open question 4…”

“…Audit regulators enforce inspection findings using different enforcement styles (Ege et al, 2020; Johnson et al, 2019; Martinow et al, 2020; Westermann et al, 2019). Regulatory enforcement styles can be viewed as existing on a continuum from critical to supportive, which is consistent with the formalism and facilitative dimensions that May and Winter (2000) proposed.…”