The change of auditors in businesses and earnings conservatism

Khairul Anuar Kamarudin, Wan Adibah Wan Ismail

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

This paper investigates the level of earnings conservatism during the first year of auditor change. We hypothesize that newly-appointed auditors demand more conservative accounting compared to established auditors due to lack of specific knowledge about the new client and higher litigation risks. We measure earnings conservatism based on the asymmetric recognition speed of good news and bad news on earnings, using Basu's reverse regression. The sample includes 3,054 firm-year observations from 2003-2008. Our results indicate that firms with a newly-appointed auditor experienced significantly higher earnings conservatism than other firms. We also find that the level of earnings conservatism required by newly-appointed auditors depends on the size of the former auditor and that of the successor. Specifically, we find that firms that change from a small audit firm to one of the Big 4 exhibit significantly higher earnings conservatism than firms that change from one of the Big 4 to a small audit firm. This evidence is consistent with the argument that auditors require more conservative accounting when the risk of litigation is higher.

Original languageEnglish
Title of host publicationISBEIA 2012 - IEEE Symposium on Business, Engineering and Industrial Applications
PublisherIEEE Computer Society
Pages268-273
Number of pages6
ISBN (Print)9781457716348
DOIs
Publication statusPublished - 2012
Externally publishedYes
EventIEEE Symposium on Business, Engineering and Industrial Applications, ISBELA 2012 - Bandung, Indonesia
Duration: Sept 23 2012Sept 26 2012

Publication series

NameISBELA 2012 - IEEE Symposium on Business, Engineering and Industrial Applications

Conference

ConferenceIEEE Symposium on Business, Engineering and Industrial Applications, ISBELA 2012
Country/TerritoryIndonesia
CityBandung
Period9/23/129/26/12

Keywords

  • Auditor changes
  • Auditor switching
  • Big 4 auditors
  • Earnings conservatism

ASJC Scopus subject areas

  • Business and International Management
  • Industrial and Manufacturing Engineering

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