Do Auditor Resignations Convey Private Information About Continuing Audit Clients?

45 Pages Posted: 25 May 2001

See all articles by Messod D. Beneish

Messod D. Beneish

Indiana University - Kelley School of Business - Department of Accounting

Patrick E. Hopkins

Indiana University - Kelley School of Business - Department of Accounting

Ivo Ph. Jansen

Rutgers University

Date Written: April 2001

Abstract

The paper investigates how auditor resignations affect capital market participants' perception of firms from which the auditors resign ("former clients") and of firms that continue as clients of the resigning auditor ("continuing clients"). We find that resignation announcements result in significant negative abnormal returns for former clients and in significant positive abnormal returns for a sample of continuing clients (matched on industry, time period, and recent stock-price performance). As in prior work on auditors' actions, these effects are most pronounced when the news media reports the resignation. We investigate continuing clients because in recent years auditors have adopted a portfolio approach to risk management that includes centralized risk-based screening. We propose that the absence of resignation signals that, despite its poor performance, the continuing client has satisfied the auditor's unobservable risk-screening process. Therefore, the positive abnormal returns observed for the continuing clients suggest that despite their poor recent performance, the auditor believes the continuing clients' accounting methods and financial reporting choices are not misleading. We rule out a competition-based intra-industry information transfer as an alternative explanation for the positive abnormal returns.

Keywords: Resignation, Auditor change, Auditing

JEL Classification: K22, K41, M40, M41, M49, G12

Suggested Citation

Beneish, Messod Daniel and Hopkins, Patrick E. and Jansen, Ivo Ph., Do Auditor Resignations Convey Private Information About Continuing Audit Clients? (April 2001). Available at SSRN: https://ssrn.com/abstract=268953 or http://dx.doi.org/10.2139/ssrn.268953

Messod Daniel Beneish (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2628 (Phone)
812-855-4985 (Fax)

Patrick E. Hopkins

Indiana University - Kelley School of Business - Department of Accounting ( email )

Kelley School of Business
1309 E. 10th Street
Bloomington, IN 47405
United States
812-855 2617 (Phone)
812-855 8679 (Fax)

Ivo Ph. Jansen

Rutgers University ( email )

227 Penn. St
Camden, NJ 08102
United States
856-225-6696 (Phone)

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