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Auditor-Client Disagreement on Internal Control: Causes and Consequences
Randal Elder, Syracuse University
Jian Zhou, SUNY at Binghamton
ABSTRACT. In this paper, we investigate auditor-client disagreement on internal control. Such disagreement occurs when the auditor and client have differing opinions concerning the effectiveness of internal control. We find that auditor-client disagreement is less likely to occur when a firm is audited by a Big 4 auditor and more likely to occur for firms with more internal control weaknesses and firms that report losses more frequently in the recent three years. Our results remain robust after controlling for various confounding factors. We further investigate the consequences of auditor-client disagreement. We do not find a relationship between auditor-client disagreement and audit fees. But we find that firms with such disagreement are more likely to have modified audit opinions and are more likely to experience auditor switches. Further investigation indicates that firms are more likely to dismiss auditors when there is a disagreement.
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