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Why Do Companies Voluntarily Change Auditors after the Sarbanes-Oxley Act?
Shu - Miao Lai, National Chengchi University
Hung - Chao Yu, National Chengchi University
ABSTRACT. In this study, we provide empirical evidence to explain one possible reason underlying the recent trend of a dramatically higher increase of auditor changes in the post-SOX periods. After controlling for self-selection bias of auditor dismissals, we find auditor dismissal companies tend to use traditional accounting accruals to manage their earnings in the pre-SOX periods, but shift to the use of real manipulation activities in the post-SOX periods. Furthermore, we find that there is a significant association between auditor dismissals and earnings management only for companies that change their auditors within the non-Big 4 CPA firms in the pre- and post-SOX periods. More importantly, it is this type of companies that switch to real manipulation activities for earnings management in the post-SOX periods. However, we do not find significant association between “downgrade” auditor changes and earnings management in the pre- and post-SOX periods.
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