An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Michael Ettredge
University of Kansas

James Heintz
University of Kansas

Chan Li
University of Kansas

Abstract: This paper adds to the literature on auditor realignments by examining the impact of actual or prospective adverse internal control opinions, rendered by auditors under Section 404 of SOX, on both dismissals and resignations. We find that companies are more likely to dismiss auditors, both before and after the receipt of adverse internal control over financial reporting (ICOFR) opinions. Auditors are more likely to resign from engagements, both before and after the issuance of adverse ICOFR opinions. Auditors are more likely to resign from an engagement if there are general (compared to specific) material weaknesses in the clients’ ICOFR, and Big 4 auditors are less likely to serve as the successor auditors when the predecessor auditors resigned from companies with general material weaknesses in their ICOFR. These findings suggest that adverse ICOFR opinions are now an important determinant of auditor realignments.

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