New findings by Dr. Al Ghosh that are being published in the Accounting Horizons.
Synopsis: Although litigation risk is considered as a leading explanation for auditor resignations, audit and business risks might also trigger resignations. Because the three risk factors are not mutually exclusive, we examine their relevance and incremental importance using measures from the pre- and post-resignation periods. Using summary indices from the pre-resignation period, we find that all the three ex-ante risk indices are incrementally important for resignations, especially when the predecessor auditor is Big 4. Because the ex-ante risk factors are prone to measurement errors, and they are less likely to capture auditor’s proprietary information about the client, we analyze data from the post-resignation period when the auditor’s proprietary information is likely to become publicly known. We find that within a three-year period following an auditor’s resignation, clients are more likely to be: (1) involved in class-action lawsuits (ex-post litigation risk), (2) have internal control problems (ex-post audit risk), and (3) delisted from a national stock exchange (ex-post business risk). Our research demonstrates that auditors consider all three risk factors, and not just litigation risk, in resignation decisions.
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