The Impact of Accounting Standards on Audit Firm Switch Rates

Abstract

Researchers have conjectured that accounting standards decrease the rate at which clients change auditors. They argue that conflict caused by disagreements over accounting standards is reduced because there are fewer acceptable accounting principles. Surprisingly, there is little empirical evidence that investigates the impact of accounting standards on audit rm switch rates. This study investigates the relationship between accounting standards and audit rm switch rates. The paper presents surprising evidence that in the year of enactment, accounting standards cause clients to change auditors at a faster rate. This nding supports the idea that con ict is created over the implementation of the standard which results in a client changing auditors. The paper also supports traditional thought by presenting evidence that in years following the issuance of an accounting standard clients change auditors at slower rates. This nding supports the idea that con ict will be reduced in future years because there are fewer acceptable accounting principles on which an auditor and a client can disagree. Data Availability: Data are available from sources identi ed in the text.

The “Big” Consequences of IFRS: How and When Does the Adoption of IFRS Benefit Global Accounting Firms?

“…The literature on agency conflicts between shareholders and firms' managers emphasizes the role of auditors as the controllers of financial reporting quality and the guardians of shareholders' interests (Williams 1988; Francis and Wilson 1988;Johnson and Lys 1990;DeFond 1992). Although financial reporting standards are supposed to limit opportunities for misreporting caused by managerial incentives, the proper implementation of these standards cannot be guaranteed (Atkinson et al 2002). 3 Consequently, there is a need to objectively assess and assure that reporting standards are applied properly, and external auditors are the ones who provide such services.…”

“…these arguments, prior research shows that client firms are more likely to switch auditors when adopting new reporting standards because of disagreements over the application of the new rules (Atkinson et al 2002). Such disagreements are also likely to arise in the IFRS adoption setting.…”

“…If this is the case, clients may be less likely to switch to global auditors. In addition, if clients switch auditors due to disagreements over application of new rules (Atkinson et al 2002), client firms from SRR may switch from small to global audit firms because they are more likely to agree with the global auditors' interpretation of IFRS. Thus, I test the following hypothesis:…”

“…In general, this paper addresses a critical question: what happens to the audit market if a change occurs in its accounting regime? Prior research has examined how changes to individual reporting standards affect audit markets (Atkinson et al 2002) and how Sarbanes-Oxley Act affected audit firms (Read et al 2004;Rama and Read 2006;Landsman et al 2009). In this paper, I examine the effects of the change of a whole financial reporting regime: the replacement of local reporting standards by IFRS.…”

An Empirical Analysis of the Global Audit Market: International Financial Reporting Standards-Related Changes and Differences within the Big 4 Global Networks

“…Over time, however, certain clients may find a smaller auditor to be more desirable. Finally, Atkinson, Taylor, Flesher, and Stocks (2002) suggest that clients are more likely to switch auditors as new individual reporting standards are implemented due to disagreements between the client and auditor regarding proper application of the new rules. In earlier years, especially before IFRS is mandated in a particular country, it may be expected that clients seek the guidance of relatively more experienced and 2 This issue became significant enough that the SEC's chief accountant cautioned the Big 4 not to use SOX 404 as justification to drop their smaller audit clients (Taub, 2004).…”