Client Concerns About Information Spillovers from Sharing Audit Partners

Kang, Jung Koo; Lennox, Clive S.; Pandey, Vivek

doi:10.2139/ssrn.3567535

Cited by 3 publications

(5 citation statements)

References 14 publications

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“…Despite auditors' codified obligation to protect sensitive client information, there is extant evidence suggesting that companies are reluctant to share an auditor with a competitor company over concerns of proprietary information spillovers (Tierney 1989;Berton and Niebuhr 1990;Aobdia 2015;Bills et al 2020;Kang et al 2020). In this study, I attempt to provide evidence as to whether companies' concerns over auditor information spillovers are justified.…”

Section: Resultsmentioning

confidence: 94%

“…Additionally, Bills et al (2020) document that, despite the potential benefits of sharing an auditor with an industry peer, companies are reluctant to share an auditor in settings where the costs of information leakage to competitors are higher. In a concurrent working paper, Kang et al (2020) examine information spillover concerns at the audit partner level and find that rival companies are less likely to share the same partner when they are more concerned about potential information spillovers. While these studies focus on companies' concerns over concurrent auditor sharing, I investigate auditor information spillovers using a setting where the potential costs of concurrent auditor sharing are nonexistent.…”

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

“…1 Under Rule 301 of the AICPA's Code of Professional Conduct, auditors are explicitly restricted from disclosing any confidential client information without the consent of the client (AICPA 2013). 2 However, despite auditors' codified obligation to protect sensitive client information, there is considerable extant evidence suggesting that companies are reluctant to share an auditor with a competitor company over concerns of proprietary information spillovers (e.g., Tierney 1989;Berton and Niebuhr 1990;Aobdia 2015;Bills, Cobabe, Pittman, and Stein 2020;Kang, Lennox, and Pandey 2020).…”

Section: Introductionmentioning

confidence: 99%

“…Recent work finds that companies are reluctant to share an auditor (or a specific audit partner) with a rival company due to information spillover concerns and that this reluctance is more prominent when the costs of information leakage are higher (Aobdia 2015;Bills et al 2020;Kang et al 2020). While these papers provide evidence consistent with companies perceiving that auditor information spillovers are costly (and conversely beneficial for companies on the receiving end of the spillovers), little extant evidence exists as to whether there are operational consequences of auditor information transfer.…”

Section: Introductionmentioning

confidence: 99%

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Auditor Information Spillovers and Company Operating Performance: Evidence from Targeted Auditor Switches

Kleppe

2020

SSRN Journal

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In this study, I examine whether companies realize operational benefits from making "targeted auditor switches" (i.e., engaging a new auditor recently dismissed by a competitor company). While prior work provides evidence consistent with companies perceiving that auditor information spillovers are costly, there is sparse extant evidence as to whether auditors actually do transfer operational information across companies. I find that companies that switch to a competitor's former auditor realize significant subsequent improvements in operating performance and that the association between targeted auditor switches and improvements in operating performance varies predictably with several across-and within-market factors. In addition, I document systematic movement in local audit markets consistent with a recognition of the value of auditors' operational knowledge. Finally, I find that companies that make targeted switches pay a significant audit fee premium to the incoming auditor and that this premium does not appear to be attributable to these companies hiring higher-quality auditors. Collectively, my findings suggest that operational information can be transferred across companies via external auditors and that companies' concerns over sharing an auditor with a competitor are based on real information spillover costs.

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Section: Resultsmentioning

confidence: 94%

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Auditor Information Spillovers and Company Operating Performance: Evidence from Targeted Auditor Switches

Kleppe

2020

SSRN Journal

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“…In fact, Dhaliwal et al (2016: 51) attribute their evidence to: "…auditors frequently [violating] their duty to put the interests of their clients ahead of their own in what appears to be a failure to protect confidential client information." Bills et al (2020) provide survey and archival evidence implying that U.S. companies routinely avoid appointing their competitors' auditor in order to prevent sensitive information from leaking; Kang et al (2020) report corroborating results at the partner level. This reinforces Aobdia's (2015) evidence from analyzing three quasi-natural experiments that auditor choice reflects that firms focus intently on constraining propriety information loss through this channel.…”

Section: Introductionmentioning

confidence: 93%

It's a Small World: The Importance of Social Connections with Auditors to Mutual Fund Managers' Portfolio Decisions.

Chen

Huang

et al. 2020

Preprint

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We examine the impact of social ties between mutual fund managers and auditors of public firms on mutual fund stockholdings. We find that mutual funds whose managers are socially connected with firm auditors hold more shares of these firms. In cross-sectional results consistent with expectations, we find that the effect of social connections on mutual fund stockholdings is more pronounced: when the social connections are stronger; for small audit firms; and for public firms with greater business opacity, stock price synchronicity, and systematic risk. We further document that mutual funds with socially connected auditors engage more in informed trading and generate superior portfolio returns. In compensation, connected auditors benefit from more audit business as well as higher audit and non-audit fees from both mutual funds and public firms. Our evidence implies information transfer from auditors to mutual fund managers through their social connections, which improves mutual fund portfolio decisions.

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It's a Small World: The Importance of Social Connections with Auditors to Mutual Fund Managers’ Portfolio Decisions

Chen

Huang

et al. 2021

J of Accounting Research

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We find that mutual funds whose managers are socially connected with firm auditors hold more shares of these firms and generate superior portfolio returns. Cross‐sectional results reveal that the relation between social connections and mutual fund stockholdings is more pronounced: when the social connections are stronger, when the auditor is in a better position or has stronger incentives to acquire private information, when the fund manager exercises more power, for small audit firms, for auditors in areas with poor investor protection, and for public firms with greater business opacity or private information. Other results are consistent with fund managers electing to schedule their corporate site visits to coincide with the fieldwork of their connected auditors, as would be expected if fund managers time their visits to meet with these auditors to facilitate information transfer. Additionally, we observe associations between fund trading prior to earnings surprises and audit opinions, and the presence of social connections between fund managers and firm auditors. Finally, we show that mutual funds and firms in which they invest tend to appoint connected auditors and pay them higher fees. Collectively, we document empirical patterns that would arise if socially connected auditors and mutual fund managers share information.

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Client Concerns About Information Spillovers from Sharing Audit Partners

Cited by 3 publications

References 14 publications

Auditor Information Spillovers and Company Operating Performance: Evidence from Targeted Auditor Switches

Auditor Information Spillovers and Company Operating Performance: Evidence from Targeted Auditor Switches

It's a Small World: The Importance of Social Connections with Auditors to Mutual Fund Managers' Portfolio Decisions.

It's a Small World: The Importance of Social Connections with Auditors to Mutual Fund Managers’ Portfolio Decisions

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