Mandatory Audit Firm Turnover, Financial Reporting Quality, and Client Bargaining Power The Case of...

51

Accounting HorizonsVol. 19, No. 2June 2005pp. 51–68

Mandatory Audit Firm Turnover,Financial Reporting Quality,

and Client Bargaining Power:The Case of Arthur Andersen

Albert L. Nagy

SYNOPSIS: This paper examines the effect of mandatory auditor change on auditquality in the unique environment created by the failure of Arthur Andersen (AA). Thefailure of AA forced a significant number of companies (ex-AA clients) to change au-ditors and also helped increase the overall skepticism exhibited on external audits. Thedemise of AA does not truly replicate a mandatory rotation regime, but it does providea rich setting to examine one aspect of such a regime—the effect that a forced auditorchange has on the level of audit quality. Furthermore, because ex-AA clients wereforced to change auditors on a one-time basis and will not necessarily have to changeauditors in the future, client bargaining power is likely to influence auditor behavior andis considered in this study’s empirical analyses. This study provides evidence that, forsmaller companies, the level of audit quality improved for companies forced to switchfrom AA, and that the negative relation between short auditor tenure and audit qualitywas effectively mitigated over the period of AA’s demise. The lack of results for largercompanies could reflect higher bargaining power toward their auditor. Further researchis needed to determine if a forced auditor change would improve audit quality for largercompanies in a true mandatory auditor rotation regime, where the amount of bargainingpower possessed by companies would seemingly diminish.

Data Availability: The data are from public sources and are available from the authorupon written request.

INTRODUCTION

The recent financial reporting failures have led to a heightened focus on the work ofexternal auditors. As a result, certain parties have called for mandatory audit firmrotation (Clapman 2003; Commission on Public Trust and Private Enterprise 2003;

Imhoff 2003; Silvers 2003). Proponents of mandatory audit firm rotation argue that a newauditor would bring to bear greater skepticism and a fresh perspective that may be lacking

Albert L. Nagy is an Associate Professor at John Carroll University.

The paper has benefited substantially from the comments of two anonymous referees and from the comments andadvice of Bob Lipe (editor). I also acknowledge the helpful comments and suggestions of Joe Carcello on earlierversions of this manuscript. Last, I thank the Wasmer Research Fund at John Carroll University for financialsupport.

Submitted: August 2004Accepted: January 2005

Corresponding author: Albert L. NagyEmail: [email protected]

52 Nagy

Accounting Horizons, June 2005

in long-standing auditor-client relationships. Also, when a company has been a client of anaudit firm for a number of years, the client can be viewed as a source of a perpetual annuity,potentially impairing the auditor’s independence. Conversely, opponents of mandatory firmrotation argue that audit quality would suffer under such a regime because the auditor wouldlack familiarity with the client and its industry (AICPA 1992; Hills 2002; BDO SeidmanLLP 2003). Furthermore, opponents of mandatory rotation point to a higher incidence ofproblem audits in the early years of the auditor-client relationship than when that relation-ship has extended for a longer period of time (St. Pierre and Anderson 1984; O’Malley2002).

The U.S. Congress appears to have straddled these divergent perspectives. Althoughthe recently enacted Sarbanes-Oxley Act (2002) does not require mandatory audit firmrotation, the Act did call for the U.S. Comptroller General to study the potential effects ofmandatory firm rotation. The General Accounting Office (GAO) recently released its studyof mandatory audit firm rotation and concludes that ‘‘mandatory audit firm rotation maynot be the most efficient way to strengthen auditor independence’’ (GAO 2003, Highlights).However, the GAO leaves open the possibility of revisiting the mandatory audit firm rotationrequirement if the other Sarbanes-Oxley Act’s requirements do not lead to improved auditquality (GAO 2003, 5). Additionally, several parties including the GAO (2003, 9), NewYork Stock Exchange (2003, 11), the Commission on Public Trust and Private Enterprise(2003, 33), and TIAA-CREF (2004, 9) suggest that periodically changing the audit firmmay enhance audit quality. Therefore, although mandatory rotation is not required at thepresent time, regulators, policy makers, and institutional investors continue to be interestedin this topic.

The renewed regulatory interest in mandatory firm rotation has sparked a renewedacademic interest in this area. Since the effects of mandatory firm rotation cannot be studiedusing U.S. archival data, the academic studies to date examine the relation between auditquality (defined using a number of different metrics) and audit firm tenure. Overall, thesestudies suggest that long auditor tenure is not associated with a decline in audit quality,but audit quality is lower in the early years of the auditor-client relationship (e.g., Geigerand Raghunandan 2002; Johnson et al. 2002; Carcello and Nagy 2004b; Ghosh and Moon2003; Myers et al. 2003). However, none of these studies can directly assess the possibleeffect of mandatory auditor rotation because all of these studies are conducted in a voluntaryauditor change environment.1

This paper contributes to the existing research by studying a forced auditor changesetting (versus a voluntary auditor change setting) that allows for a more direct examinationof how audit quality is affected by a mandatory auditor change and an increase in auditorskepticism. The recent failure of Arthur Andersen (AA) forced many companies to changeauditors and also helped increase the overall level of skepticism exhibited on all externalaudits. Although ex-AA clients were forced to change auditors, they will not necessarilyhave to change auditors in the future, thus the post-AA environment is not a true replicationof a mandatory auditor change regime.2 As a result, the events analyzed in this study arenot fully representative of a mandatory rotation environment, but they do allow me to

1 Johnson et al. (2002) and Myers et al. (2003) attempt to mitigate the problems of potentially opportunisticswitching behavior, which can characterize a voluntary auditor change environment, by excluding first-yearswitchers or by excluding companies that did not retain their auditor for at least five years.

2 Another difference between the situation with ex-AA clients and a mandatory auditor rotation requirement isthat not all of a firm’s clients would have to be rotated each year.

Mandatory Audit Firm Turnover, Financial Reporting Quality, and Client Bargaining Power 53


examine the effect that a forced auditor change has on audit quality in ways that areunachievable with a sample of voluntary changes. Additionally, the failure of AA and thenewly issued Sarbanes-Oxley Act of 2002, along with a renewed interest in the externalaudit function by the financial community, has seemingly raised the overall level of skep-ticism of external auditors. I posit that this increased skepticism will improve the auditquality of new audit engagements.

I find evidence of a negative relation between discretionary accruals and ex-AA clients,but only for companies in the lower half of the sample based on size. This result suggeststhat a forced auditor change is associated with a decline in discretionary accruals when theclients are small and have less bargaining power (as measured by size of the client). Ad-ditionally, I find evidence that the significant and positive relation between discretionaryaccruals and short auditor tenure disappears in the years following the failure of AA, butagain only for companies in the lower of half of the sample. This result suggests that forsmall companies, an increase in auditor skepticism alleviates the positive relation betweenshort auditor tenure and discretionary accruals. In other words, a healthy dose of skepticismseems to mitigate the auditing hazards associated with new engagements for small com-panies that have lower levels of bargaining power.

The remainder of this paper is organized as follows. The next section discusses thebackground and previous auditor rotation and client bargaining power research. I thenpresent the research design, including the statistical model and variable measurement. Sub-sequent sections discuss the sample selection and results. The last section contains a sum-mary and a discussion of the study’s limitations.

BACKGROUNDResearchers have attempted to uncover the likely effect on audit quality of a mandatory

rotation regime by examining the relation between audit quality and auditor tenure. Auditquality is measured by considering auditor reporting prior to bankruptcy (Geiger andRaghunandan 2002), fraudulent financial reporting (Carcello and Nagy 2004b) and, mostcommonly, various accrual-based measures (Johnson et al. 2002; Ghosh and Moon 2003;Myers et al. 2003).

Geiger and Raghunandan (2002) find that auditors are more likely to issue a clean auditreport prior to a bankruptcy filing in the early years of the auditor-client relationship.Carcello and Nagy (2004b) find that fraudulent financial reporting is higher in the earlyyears of the auditor-client relationship (as compared to ‘‘medium’’ audit tenure), whereasthey find no evidence that fraudulent financial reporting is higher for long auditor tenure(nine years or longer).

A number of other studies (Johnson et al. 2002; Ghosh and Moon 2003; Myers et al.2003) examine the relation between various accrual-based measures, as proxies for financialreporting quality, and auditor tenure. Johnson et al. (2002) find that the absolute value ofunexpected accruals is higher in the early years of the auditor-client relationship (as com-pared to ‘‘medium’’ auditor tenure), whereas they find no relation for long tenure relation-ships (nine years or longer). Similarly, Ghosh and Moon (2003) find that absolute discre-tionary accruals and the use of large negative special items to manage earnings declinewith auditor tenure. Finally, Myers et al. (2003) find that longer auditor tenure is associatedwith higher earnings quality, using absolute discretionary accruals and absolute currentaccruals to proxy for earnings quality. A limitation of these studies, recognized by most ofthese authors (e.g., Geiger and Raghunandan 2002, 75; Johnson et al. 2002, 655; Myers etal. 2003, 21), is that their results from a voluntary auditor change environment may not

54 Nagy


extend to a mandatory auditor change environment if such a requirement was imposed onU.S. public companies.

In a mandatory rotation regime, a new auditor may bring greater skepticism to theaudit. Also, the auditor would not view the client as a source of a perpetual annuity. A newauditor could conceivably bring greater skepticism to the audit, whether the new auditorwas hired after a voluntary change, as a result of the failure of AA, or as a result of amandatory rotation requirement. However, I view a company’s need to change auditors asfundamentally different from a company’s desire to change auditors. By making a voluntaryauditor change, the company can:

● seek an accounting firm whose views on accounting and reporting matters are moreconsonant with those of the company;

● seek an accounting firm that the company views as more pliable; and● signal that the company is willing to change auditors in the future.

All of these conditions suggest that an auditor may act differently for a company thatvoluntarily changed auditors than for a company forced to change auditors. I posit that theAA auditor changes (versus voluntary auditor changes) more closely resemble auditorchanges of a mandatory rotation regime. Unlike a mandatory auditor rotation regime, how-ever, companies involved in both voluntary and forced (from AA) changes are not requiredto change auditors in the future, and thus they may still possess bargaining power towardthe successor auditors. Client bargaining power effects are considered in this study’s anal-ysis and are discussed in the next section.

Based on the above discussion, the higher level of skepticism associated with a forcedauditor change (versus a voluntary auditor change) is expected to increase the level of auditquality. However, the successor auditor of a forced auditor change is still confronted withthe unfamiliarity and the learning curve of a new engagement. Therefore, it is unclear ifthe increase in skepticism would overcome the hazards of a new engagement, and thus Ioffer no prediction on the overall effect of a forced auditor change on audit quality. I doexpect that, because of the increase in skepticism, changing from AA to another auditorwill improve audit quality to a greater degree than voluntary auditor changes.

In addition to examining the relation between ex-AA companies and discretionary ac-cruals, this paper also studies the impact of an increased level of skepticism on the levelof audit quality level for all new engagements. In an unpublished study, Balsam (2004)finds that discretionary accruals are lower for years after the AA demise than they were inprior years. The study also finds that ex-AA clients that remained with a Big 4 auditorafter AA’s demise had even lower discretionary accruals. Balsam’s (2004) results suggestthat other auditors, observing consequences to AA, became more vigilant with their clients,especially ex-AA clients.3 The demise of AA should not affect the level of expertise andclient understanding that auditors bring to new engagements. This paper examines theinfluence of increased skepticism on the relation between short auditor tenure and discre-tionary accruals. I expect that the increase in skepticism will improve the audit quality ofnew engagements (i.e., mitigate the negative relation between audit quality and short auditortenure).

3 This paper differs from Balsam (2004) by considering the effect that client bargaining power has on the discre-tionary accruals and ex-AA relation, and by examining the effect of increased skepticism resulting from AA’sdemise on audits performed in the early years of an auditor’s tenure.



Client Bargaining PowerZhang’s (1999) analytical model demonstrates that the quasi-rents earned in audits

undermine an auditor’s independence, and that the extent of the compromise is an increasingfunction of the quasi-rents. Because audit fees increase with client size (Francis and Simon1987), prior research uses client size measures as proxies for bargaining power. Evidenceshows that the amount of client bargaining power influences auditor behavior. Specifically,McKeown et al. (1991) find that larger clients are less likely to receive a going-concernopinion, even after controlling for the effect of client size on the probability of businessfailure. Nelson et al. (2002) find that auditors are more likely to waive proposed auditadjustments for larger clients. Finally, Carcello and Nagy (2004a) find that the negativerelation between auditor industry specialization and financial fraud is weaker for largerclients.

Under a mandatory rotation regime, the future annuities of a given client would berestricted to a set number of years, and the smaller annuities would effectively reduce theamount of client bargaining power. Although ex-AA clients were forced to change auditors,they will not necessarily have to change auditors in the future. Therefore, client bargainingpower is not diminished in the post-AA environment and is considered in this study’sempirical analyses. I rely on the Casterella et al. (2004) client bargaining power measuresto capture both the absolute size and relative size of client bargaining power. The calcu-lations of these two client bargaining power measures are discussed in the next section.

RESEARCH DESIGNNumerous studies examine the association between accounting accruals and various

audit quality proxies. That body of work suggests that the amount of discretionary account-ing accruals is a reasonable indicator of audit quality. Specifically, discretionary accrualsare associated with the issuance of qualified audit opinions (Bartov et al. 2000), auditorchanges (DeFond and Subramanyam 1998), eventual auditor litigation (Heninger 2001),and greater auditor conservatism (Francis et al. 1999). Based on prior research, I posit thatthe absolute value of discretionary accruals is a reasonable indicator of audit quality.4 Theregression model employed examines the association between both the forced auditorchange (from AA) and the overall AA demise effect (period effect) on discretionaryaccruals.

The two measures for client bargaining power are borrowed from Casterella et al.(2004). In their study, the authors argue that both the absolute and relative size of the clientare important. That is, large clients are more economically important to the auditor simplybecause their audit fees are greater (absolute size), and if industry expertise is of value,then the economic importance of the client is also influenced by the size of the clientrelative to the auditor’s other industry clients (relative size). Consistent with Casterella etal. (2004), the regression for this study includes a control variable measuring the relativesize of the client, while the absolute size is implicitly tested by estimating the regressionseparately for smaller and larger companies.

The following regression equation is estimated for the four-year period surrounding thedemise of AA (2000–2003) for both the upper and lower halves of the sample:

4 Following prior research that did not have a clear a priori expectation of management’s incentives, I use theabsolute value of discretionary accruals (versus directional unexpected accruals) as a proxy for audit quality(Warfield et al. 1995; Francis et al. 1999; Bartov et al. 2000; Klein 2002; Johnson et al. 2002).

56 Nagy


ACCRUALS � � � � ANDERSEN � � SHORT � � LONG � � PD � � SIZE1 2 3 4 5

� � AGE � � GROWTH � � CFLOW � � LEV � � POWER6 7 8 9 10

� � (Variable*PD) � � INDUSTRY � �11–19 20–64

where:

ACCRUALS � absolute value of discretionary accruals, computed using the cross-sectionalversion of the modified Jones (1991) model; total accruals are computeddirectly from the statement of cash flows (Hribar and Collins 2002);5

ANDERSEN � 1 if the auditor in 2000 and 2001 was AA (for 2002 and 2003 this variableequals 1 if AA was the ex-auditor), else 0;

SHORT � 1 if auditor tenure is less than four years and not an AA or ex-AA obser-vation, else 0;6

LONG � 1 if auditor tenure is greater than eight years, else 0;PD � 1 for 2002 and 2003 observations, 0 for 2000 and 2001 observations;

SIZE � the log of total assets;AGE � the number of years for which total assets is reported in Research Insight

since 1982;GROWTH � change in total assets scaled by prior year total assets;

CFLOW � the company’s cash flow from operations scaled by prior year total assets;LEV � total liabilities scaled by prior year total assets;

POWER � natural log of sales divided by the sum of industry sales for all firms inthe industry audited by the company’s auditor;

Variable*PD � interaction terms consisting of all the independent variables (except forPD) multiplied by PD; and

INDUSTRY � dummy variables based on two-digit SIC codes (44 industries).

AA was indicted and convicted by the U.S. Department of Justice during the first halfof 2002 (March and June, respectively), and thus 2000 and 2001 (2002 and 2003) areconsidered to be the pre-event (post-event) years.7 The regression model was estimatedusing data from the sampled years 2000–2003. Balsam’s (2004) results suggest that thedemise of AA and subsequent governmental investigation and legal actions led to other

5 Following prior research, I calculated abnormal accruals by estimating the following model by year and two-digit SIC Code:

TA � � � � (�REV � �AR) � � (PPE)1 2 3

where:

TA � earnings before extraordinary items minus cash flows from continuing operations;REV � total sales revenue;

AR � accounts receivable; andPPE � gross property, plant, and equipment.

All variables are scaled by prior year total assets. The residual of the above regression is the abnormal accrual.All year and SIC code groupings with less than ten observations were deleted from analyses.

6 I adopt the definition of short and long tenure from previous research (Carcello and Nagy 2004b; Johnson etal. 2002). A sensitivity analysis using a continuous measure of tenure is performed later in the paper.

7 A sensitivity test concerning this cutoff is performed later in the paper.



auditors becoming more vigilant (i.e., increased skepticism) with their clients. The PDvariable measures the overall period effect of AA’s demise on discretionary accruals. Theinteraction term ANDERSEN*PD measures the influence that the forced auditor change forex-AA clients has on ACCRUALS. A negative coefficient on this interaction term wouldsuggest that the forced auditor change is associated with a decline in discretionary accruals(an increase in audit quality).

Consistent with prior research, I expect a significant and positive SHORT coefficient(�2). The SHORT*PD and LONG*PD interaction terms measure the impact that the periodeffect has on the relation between auditor tenure and discretionary accruals. Negative co-efficients on these terms would be consistent with a healthy dose of skepticism from theexternal auditor mitigating the negative effects that short and long auditor tenures have ondiscretionary accruals.

The control variables SIZE, AGE, GROWTH, CFLOW, and LEV are drawn fromJohnson et al. (2002) and Myers et al. (2003). Consistent with prior research, the coefficients�5, �6, and �8 (�7, �9) are predicted to be negative (positive). The control variable POWERis drawn from Casterella et al. (2004) and measures the relative size (bargaining power) ofthe client. �10 is expected to be positive. Absolute size of the client is the other bargainingpower measure and is implicitly tested by estimating the above regression separately forsmaller and larger companies. The parameters PERIOD, ANDERSEN*PD, and SHORT*PDare expected to be less negative for the larger half of the sample due to these companiespossessing greater amounts of client bargaining power.

SAMPLEThe initial sample consists of all firms listed on the Research Insight full coverage and

research files for the years 2000 to 2003 with sufficient data to estimate discretionaryaccruals. Consistent with Hribar and Collins (2002), I eliminate firms that have undergonea merger or acquisition.8 Prior research provides evidence that Big 6 auditors provide higherquality audits (or are perceived to provide higher quality audits) than those provided bynon-Big 6 auditors (Palmrose 1988; Becker et al. 1998; Francis et al. 1999; Teoh and Wong1993). In an effort to avoid this potential confound, I eliminate all observations audited bynon-Big 5/Big 4 auditors. Given the fundamentally different operating characteristics as-sociated with financial institutions, I exclude banks and insurance companies from theanalyses (SIC Codes 4000–4999 and 6000–6999). Last, I exclude observations in the ex-treme 1.0 percent of the discretionary accruals distribution to remove outliers.9 After con-sidering the above criteria and the control variables’ data requirements, the sample consistsof a total of 12,781 observations.

RESULTSDescriptive Statistics

Table 1 presents descriptive statistics for each of the base variables included inthe regression model. The means and standard deviations are presented by pre-event(2000–2001) and post-event (2002–2003) periods for the full sample and for each of the

8 I follow Hribar and Collins’ (2002) method of identifying firms with mergers and acquisitions by using footnotecodes appearing in Research Insight.

9 When the extreme 1.0 percent is winsorized, the results are consistent with those presented. Additionally, whenthese observations are included in the sample, the results are generally consistent with those presented. Theminor difference in the test variables is the ex-AA effect (ANDERSEN*PD) becomes slightly less significant forthe smaller sample (two-tailed p-value � .054).

58N

agy

Accounting

Horizons,

June2005

TABLE 1Descriptive Statistics

mean [standard deviation]

Variable

Full Sample2000–2001(n � 6,901)

2002–2003(n � 5,880)

All Years(n � 12,781)

Lower Half2000–2001(n � 3,450)

2002–2003(n � 2,940)


Upper Half2000–2001(n � 3,451)

2002–2003(n � 2,940)


ACCRUALS 0.145 0.093 0.121 0.187* 0.117* 0.155* 0.103* 0.069* 0.087*[0.187] [0.122] [0.162] [0.213] [0.143] [0.187] [0.145] [0.089] [0.123]

ANDERSEN 0.199 0.167 0.184 0.195 0.154* 0.176* 0.202 0.181* 0.192*[0.399] [0.373] [0.388] [0.397] [0.361] [0.381] [0.402] [0.385] [0.394]

SHORT 0.248 0.159 0.207 0.277* 0.193* 0.238* 0.220* 0.124* 0.176*[0.432] [0.365] [0.405] [0.447] [0.395] [0.426] [0.414] [0.330] [0.381]

LONG 0.307 0.377 0.339 0.239* 0.289* 0.262* 0.376* 0.465* 0.417*[0.461] [0.485] [0.473] [0.426] [0.453] [0.440] [0.484] [0.499] [0.493]

SIZE 5.264 5.485 5.366 3.692* 3.899* 3.788* 6.835* 7.071* 6.944*[2.000] [2.009] [2.007] [1.098] [1.125] [1.115] [1.361] [1.332] [1.353]

AGE 10.19 11.87 10.96 9.254* 10.64* 9.892* 11.12* 13.10* 12.03*[5.469] [5.763] [5.668] [5.225] [5.480] [5.388] [5.548] [5.777] [5.739]

GROWTH 0.231 0.021 0.135 0.284 0.002* 0.154 0.178 0.040* 0.115[3.264] [0.429] [2.418] [4.455] [0.543] [3.297] [1.207] [0.268] [0.908]

CFLOW �0.017 0.030 0.004 �0.121* �0.036* �0.082* 0.086* 0.096* 0.091*[0.568] [0.332] [0.475] [0.777] [0.448] [0.648] [0.142] [0.106] [0.127]

LEV 0.619 0.552 0.588 0.605 0.493* 0.554 0.633 0.610* 0.622[3.504] [0.917] [2.649] [4.943] [1.248] [3.730] [0.345] [0.345] [0.345]

POWER 0.058 0.055 0.057 0.034* 0.035* 0.034* 0.081* 0.076* 0.079*[0.094] [0.090] [0.092] [0.073] [0.073] [0.073] [0.107] [0.100] [0.104]

* t-test significant at � .01 (or Chi-square test for categorical variables) for a test of difference in lower half versus upper-half sample means.Variable Definitions:ACCRUALS � absolute value of discretionary accruals, computed using the cross-sectional version of the modified Jones (1991) model;ANDERSEN � 1 if the auditor in 2000 and 2001 was AA (for 2002 and 2003 this variable equals 1 if AA was the ex-auditor), else 0;

SHORT � 1 if auditor tenure is less than four years, else 0;LONG � 1 if auditor tenure is greater than eight years, else 0;

SIZE � the log of total assets;AGE � the number of years for which total assets is reported in Research Insight since 1982;

GROWTH � change in total assets divided by prior year total assets;CFLOW � cash flow from operations divided by prior year total assets;

LEV � total liabilities divided by prior year total assets; andPOWER � natural log of sales divided by the sum of industry sales for all firms in the industry audited by the company’s auditor.



subsamples (lower and upper halves).10 Univariate comparisons indicate that several meansbetween the upper and lower subsamples differ significantly. Specifically, the upper halfobservations are generally older, have greater levels of cash flows, and longer auditor ten-ures than the lower half. Furthermore, the upper half has lower levels of discretionaryaccruals and more ex-AA clients than that of the lower half. Although not reported, theACCRUALS mean declines significantly from the pre-event period (2000–2001) to the post-event period (2002–2003) for the full sample, upper half, and lower half. Consistent withexpectations, this decline is greater for the lower half of the sample.

Table 2 presents the correlations among the independent variables for the upper andlower halves of the sample. The ex-AA clients tend to be older, have higher growth,and have larger amounts of leverage. For both the upper and lower samples, clients withshort (long) auditor tenure tend to be younger (older), have high (low) growth, lower(higher) cash flows, and higher levels of debt. Older, more mature companies tend to havehigher cash flows, lower growth, and lower levels of debt. Last, AGE and CFLOW arepositively correlated with POWER, suggesting that older companies with higher levels ofcash flow make up a higher percent of the auditor’s market share.

Given some relatively high correlations, particularly in the lower half between LEV andGROWTH (0.906), CFLOW and GROWTH (�0.685), and LEV and CFLOW (�0.681), Icomputed the variance inflation factors (VIFs) to assess the susceptibility of the model toproblems of multicollinearity. Gujarati (1995, 339) suggests that multicollinearity is unlikelyto be problematic if the variance inflation factors are below 10.0. For the regression esti-mated using the lower half of the sample, the VIF on the GROWTH variable exceeded 10.0.When excluding GROWTH from this model, all the VIFs of the base variables fall below10.0 and the reported results remain qualitatively unchanged. None of the other regressionmodels had a base variable with a VIF exceeding 10.0.

Primary TestsTable 3 presents the results of the OLS regression model estimated for the full sample

and each of the lower and upper halves.11 For each set of results (full, lower, and upper),the first column presents the estimated coefficient for the main variable and its relatedt-statistic. The second column presents the coefficient of the interaction variable (i.e., themain variable multiplied by PD) along with its related t-statistic. All three models are highlysignificant and have adjusted R2s between 15.14 percent and 20.27 percent.12

The period variable (PD) is negative and significant for all three models, and suggeststhat the absolute values of discretionary accruals declined subsequent to AA’s failure. TheSHORT variable is positive and significant for both the full and lower-half samples.The negative and significant SHORT*PD interaction term for both the full and lower-halfsamples suggests that the positive relation between SHORT and ACCRUALS is significantlyless after AA’s demise. The interaction term ANDERSEN*PD is significant for both the fulland the lower-half samples, but it is not significant for the upper-half sample. This resultsuggests that the forced auditor change from AA is associated with decreased discretionary

10 Consistent with Casterella et al. (2004), the sample is split based on each year’s log of total asset median (SIZEmedian).

11 The coefficients for each industry are not included in Table 3 in the interest of brevity.12 Aiken and West (1991) recommend centering the continuous variables in regressions such as mine. Centered

regressions assess the effects of the dummy variables at the mean of the continuous variables. When I usecentered data, the results are identical as those reported except for the PD variable; while these coefficients arenot as negative, they remain significantly less than zero for the full, lower half, and upper half samples.

60N

agy

Accounting

Horizons,

June2005

TABLE 2Pearson Correlation Matrices

Upper Half of Sample (n � 6,391)

ANDERSEN SHORT LONG SIZE AGE GROWTH CFLOW LEV POWER

ANDERSEN 1.000SHORT �0.075** 1.000LONG �0.412** �0.390** 1.000SIZE �0.050** �0.047** 0.175** 1.000AGE 0.036** �0.336** 0.523** 0.284** 1.000GROWTH �0.013 0.121** �0.058** �0.054** �0.111** 1.000CFLOW 0.024 �0.059** 0.058** 0.088** 0.104** �0.048** 1.000LEV 0.047** 0.098** �0.085** 0.099** �0.055** 0.167** �0.080** 1.000POWER 0.031* 0.007 0.001 0.087** 0.041** �0.053** 0.037** 0.089** 1.000

Lower Half of Sample (n � 6,390)

ANDERSEN SHORT LONG SIZE AGE GROWTH CFLOW LEV POWER

ANDERSEN 1.000SHORT �0.087** 1.000LONG �0.276** �0.333** 1.000SIZE 0.013 �0.050** 0.020 1.000AGE 0.012 �0.239** 0.517** �0.020 1.000GROWTH 0.025* 0.084** �0.024 0.010 �0.063** 1.000CFLOW 0.008 �0.087** 0.076** 0.235** 0.152** �0.685** 1.000LEV 0.026* 0.040** �0.013 �0.051** �0.027* 0.906** �0.681** 1.000POWER �0.008 �0.002 0.075** 0.203** 0.086** �0.014 0.100** �0.001 1.000

**,* Significant at the .01 and .05 levels, respectively.See Table 1 for variable descriptions.

Mandatory

Audit

Firm

Turnover,F

inancialR

eportingQ

uality,and

Client

Bargaining

Power

61

Accounting

Horizons,

June2005

TABLE 3Regression Model

coefficient [t-statistic]

ACCRUALS � � � � ANDERSEN � � SHORT � � LONG � � PD � � SIZE � � AGE � � GROWTH � � CFLOW � � LEV1 2 3 4 5 6 7 8 9

� � POWER � � (Variable*PD) � � INDUSTRY � ε10 11–19 20–64

VariablePrediction(Main Var)

Full SampleMain

VariableInteraction(Var*PD)

Lower HalfMain


Upper HalfMain


Intercept none 0.323*** 0.368*** 0.247***[47.48] [25.51] [22.06]

ANDERSEN none 0.012** �0.018** 0.020** �0.036*** 0.004 �0.004[2.41] [2.30] [2.47] [2.82] [0.75] [0.47]

SHORT none 0.025*** �0.018** 0.039*** �0.037*** 0.001 0.005[5.48] [2.42] [5.44] [3.15] [0.16] [0.60]

LONG none 0.012** �0.012 0.014 �0.010 0.005 �0.009[2.24] [1.53] [1.58] [0.79] [0.86] [1.11]

PD � �0.104*** �0.093*** �0.081***[11.27] [4.58] [5.17]

SIZE � �0.018*** 0.007*** �0.029*** 0.006 �0.007*** 0.002[17.50] [4.75] [9.80] [1.50] [4.68] [0.77]

AGE � �0.002*** 0.001** �0.002*** 0.001 �0.002*** 0.001**[4.58] [2.13] [2.81] [1.16] [4.96] [2.01]

GROWTH � 0.009*** �0.001 0.002 0.024*** 0.027*** �0.092***[6.75] [0.24] [0.88] [3.66] [16.38] [10.05]

CFLOW � �0.024*** 0.022** �0.021*** 0.024** �0.102*** 0.158***[4.74] [2.48] [3.22] [2.12] [7.41] [6.18]

LEV � �0.010 0.020*** �0.004 0.012*** �0.001 0.025***[8.24] [7.06] [2.25] [3.37] [0.05] [2.82]

POWER � �0.077 0.152*** �0.043 0.236*** �0.089 0.098***[3.04] [5.04] [0.86] [3.77] [3.57] [3.50]

Sample Size 12,781 6,390 6,391Adjusted R2 18.34% 15.14% 20.27%F-ratio 46.56*** 19.09*** 26.78***

*,**,*** Indicate significance at p � 0.10, p � 0.05, and p � 0.01, respectively (based on one-tailed tests where relation is predicted).See Table 1 for variable descriptions.

62 Nagy


accruals for smaller companies. The control variables SIZE, AGE, and CFLOW are signif-icant in the predicted direction for all three models. The variable GROWTH is positive andsignificant for two of the models, and LEV and POWER are not significant for any of themodels.

The regression results suggest a reduction in the absolute value of discretionary accrualsfor smaller companies that were forced to change auditors from AA. This finding lendssome support to an increase in audit quality following a forced auditor change for com-panies with limited amounts of bargaining power (as measured by the client’s absolutesize). Additional results show lower audit quality for short auditor tenure only for the smallclients in the period prior to AA’s failure. Interestingly, this significantly negative effectgoes away in the period after AA’s failure, possibly due to auditors of small firms becomingmore skeptical. Large clients did not show any incremental association between short-tenureand audit quality, which is a new and unexpected finding. However, since the lack of anassociation is consistent pre- and post-AA demise, further investigation of the link betweenshort-tenure and size is left to future research.

Additional AnalysesTo assess the robustness of the results, I perform four sets of additional analyses. The

first additional analysis compares the different effects of forced auditor changes and vol-untary auditor changes on discretionary accruals during the sampled time period. I reranthe regressions including a dummy variable (VOLSW), along with the related interactionterm (VOLSW*PD), that equals 1 if the company changed from one Big 4 auditor to anotherBig 4 auditor (excluding changes from AA) from 2001 to 2002. The variable VOLSWcaptures voluntary auditor changes from 2001 to 2002 and parallels the period of the forcedauditor changes resulting from AA’s demise. Overall, I identify 111 voluntary auditorchanges in the sample during this period. The regression results are presented in Table 4.

Prior research provides evidence that is consistent with auditor changes being precip-itated by auditor conservatism (DeFond and Subramanyam 1998; Krishnan 1994). Consis-tent with prior research, VOLSW is negative and significant for the full and lower-halfsamples, and the VOLSW*PD is positive and significant for the lower-half sample. TheVOLSW and VOLSW*PD variables are not significant for the upper-half sample.13 The re-sults on the ANDERSEN and ANDERSEN*PD variables are consistent with those presentedin the main analysis. These findings suggest that, for smaller companies, voluntary auditorchanges are precipitated by auditor conservatism and results in lower audit quality fromthe successor auditor. In contrast, for smaller companies, forced auditor changes result inhigher audit quality from the successor auditor. In sum, these results suggest that the effectof an auditor change on discretionary accruals is dependent upon whether the change isvoluntary or forced, and illuminate the problem of studying mandatory auditor rotation ina voluntary change regime.

The second additional analysis considers the sensitivity of the results to the period cut-off date. The problems surrounding Enron began surfacing in October 2001 when thecompany announced that it was taking a $1.01 billion nonrecurring charge to earnings. AAwas indicted in March 2002, convicted in June 2002, and started losing a significant amountof clients during this time period. For the main analysis, I consider 12/31/01 to be theevent cut-off date because both the Enron and AA investigations intensified in early 2002

13 This result suggests that large companies with high amounts of bargaining power change auditors for reasonsother than auditor conservatism by the predecessor auditor. An examination for these possible factors is beyondthe scope of this paper and is left for future research.

Mandatory

Audit

Firm

Turnover,F

inancialR

eportingQ

uality,and

Client

Bargaining

Power

63

Accounting

Horizons,

June2005

TABLE 4Regression Model Including Voluntary Switches

coefficient [t-statistic]

ACCRUALS � � � � ANDERSEN � � VOLSW � � SHORT � � LONG � � PD � � SIZE � � AGE � � GROWTH � � CFLOW1 2 3 4 5 6 7 8 9

� � LEV � � POWER � � (Variable*PD) � � INDUSTRY � ε10 11 12–21 22–66

VariablePrediction(Main Var)

Full SampleMain


Lower HalfMain


Upper HalfMain


Intercept none 0.322*** 0.367*** 0.247***[47.28] [25.42] [22.03]

ANDERSEN none 0.010* �0.016** 0.016* �0.032** 0.004 �0.004[1.90] [1.99] [1.96] [2.50] [0.73] [0.46]

VOLSW none �0.023*** 0.020 �0.039*** 0.044** �0.001 �0.001[2.59] [1.43] [2.76] [2.00] [0.04] [0.03]

SHORT none 0.030*** �0.023*** 0.048*** �0.047*** 0.001 0.005[6.06] [2.72] [6.09] [3.64] [0.16] [0.56]

LONG none 0.010* �0.010* 0.012 �0.007 0.005 �0.009[1.83] [1.26] [1.17] [0.50] [0.85] [1.10]

PD � �0.103*** �0.091*** �0.081***[11.16] [4.48] [5.16]

SIZE � �0.018*** 0.007*** �0.030*** 0.007 �0.007*** 0.002[17.55] [4.79] [9.89] [1.54] [4.68] [0.77]

AGE � �0.002*** 0.001* �0.002** 0.001 �0.002*** 0.001**[3.97] [1.75] [2.20] [0.72] [4.86] [1.99]

GROWTH � 0.009*** �0.001 0.002 0.024*** 0.027*** �0.092***[6.61] [0.22] [0.77] [3.71] [16.35] [10.04]

CFLOW � �0.023*** 0.022** �0.021*** 0.024** �0.102*** 0.158***[4.72] [2.46] [3.17] [2.10] [7.40] [6.17]

LEV � �0.010 0.020*** �0.004 0.012*** �0.001 0.024***[8.10] [7.00] [2.12] [3.32] [0.05] [2.82]

POWER � �0.077 0.152*** �0.043 0.238*** �0.089 0.098***[3.05] [5.04] [0.86] [3.80] [3.57] [3.50]

Sample Size 12,781 6,390 6,391Adjusted R2 18.37% 15.21% 20.24%F-ratio 45.25*** 18.64*** 25.95***

(continued on next page)

64 Nagy


TABLE 4 (Continued)

*,**, *** Indicate significance at p � 0.10, p � 0.05, and p � 0.01, respectively (one-tailed tests for predictedrelations).

Variables:ACCRUALS � absolute value of discretionary accruals, computed using the cross-sectional version of the

modified Jones (1991) model;ANDERSEN � 1 if the auditor in 2000 and 2001 was AA (for 2002 and 2003 this variable equals 1 if AA was

the ex-auditor), else 0;VOLSW � 1 if auditor changed from 2001 to 2002 (excluding AA changes), else 0;SHORT � 1 if auditor tenure is less than four years, else 0;LONG � 1 if auditor tenure is greater than eight years, else 0;

PD � 1 for 2002 and 2003 observations, 0 for 2000 and 2001 observations;SIZE � the log of total assets;AGE � the number of years that total assets is reported in Research Insight since 1982;

GROWTH � change in total assets divided by prior year total assets;CFLOW � cash flow from operations divided by prior year total assets;

LEV � total liabilities divided by prior year total assets; andPOWER � natural log of sales divided by the sum of industry sales for all firms in the industry audited by

the company’s auditor.

and AA began losing a significant amount of clients in early 2002.14 Since the event cut-off date is arbitrary, I reran the regressions excluding observations from the period October2001 to June 2002. When excluding these observations, the results remain consistent withthose presented in Table 3.

The third additional analysis considers the sensitivity of the results to measurement ofthe auditor tenure variables. The cut-offs used to construct the auditor tenure variablesSHORT and LONG are arbitrary. I relied on prior research in determining the short andlong auditor tenure cut-offs (Johnson et al. 2002; Carcello and Nagy 2004b). To test thesensitivity of the results to these arbitrary cut-offs, I reran the Table 3 regressions replacingthe SHORT and LONG variables with a continuous auditor tenure measure, the natural logof auditor tenure (LNTEN). For the lower-half sample, LNTEN is negative and marginallysignificant (p � 0.07). The interaction term, LNTEN*PD, is positive and not significant forboth the full and lower-half samples, and the sum of the coefficients LNTEN andLNTEN*PD is not significantly different from zero for either sample. Consistent with thereported results, this finding suggests that the auditor tenure and discretionary accrualsrelation is mitigated in the period subsequent to the failure of AA for smaller companies.Also consistent with the reported results, the ANDERSEN*PD coefficient is negative andsignificant (p � .05) for the lower-half sample.

The last additional analysis considers the possibility that the discretionary accrualsmodel is misspecified. Previous research shows that discretionary accrual models are mis-specified when applied to stratified-random samples of firms (Dechow et al. 1995; Guay etal. 1996). Kothari et al. (2005) provide evidence that performance matching on return onassets controls for the effect of performance on measured discretionary accruals and helpsmitigate model-misspecification issues.

Following Kothari et al.’s (2005) suggestion, I reran the Table 3 regressions using amatched sample of observations. I compiled a sample of 4,506 observations by matchingthe ex-AA clients with a control group on year, industry, and return on assets (ROA). For

14 Per Research Insight, AA was listed as the auditor for 1,222 companies in 2000; 1,145 companies in 2001; and72 companies in 2002. Of the 72 companies that had AA as an auditor in 2002, 70 had a fiscal year-end beforeJune. Thus, AA had effectively ceased auditing public companies by June 2002.



the full sample, some of the test variables are less significant than the results presented inTable 3. Specifically, the ANDERSEN variable is positive and marginally significant (p-value � .09), and the ANDERSEN*PD variable is no longer significant (p-value � .17).The results for SHORT, SHORT*PD, and PD are consistent with those presented in Table3 for the full sample. For the lower-half sample, the significance on some of the testvariables are also somewhat weaker than those presented in Table 3. The interaction termsANDERSEN*PD and SHORT*PD are significant at the p � .05 level and the p � .10 level,respectively. The results for ANDERSEN, SHORT, and PD are consistent with those pre-sented in Table 3 for the lower-half sample. For the upper-half sample, the results areconsistent with those presented in Table 3. Thus, the results of the matched sample analysisare consistent with the results presented in Table 3, albeit somewhat weaker. In summary,based on the additional analyses performed, the reported results appear robust.

SUMMARY, IMPLICATIONS, AND LIMITATIONSPrevious research provides evidence that short auditor tenure is associated with lower

quality audits and generally does not support mandatory auditor rotation. However, a lim-itation of prior research is that it is performed under a voluntary change regime, and theresults may not extend to a mandatory change regime. The failure of AA forced a significantnumber of companies (AA clients) to change auditors and also helped increase the overallskepticism of all external auditors. This event provides a rich setting to examine the effectsthat a forced auditor change and an increase in skepticism have on audit quality.

I find a significant decrease in discretionary accruals for ex-AA clients following theforced change from AA, but only for smaller firms. I fail to find an association betweenex-AA clients and discretionary accruals for larger companies. I also provide evidence ofan overall decline in discretionary accruals following the failure of AA, suggesting anincrease in the overall skepticism exhibited on all external audits. Moreover, for smallercompanies, the significant positive relation between short auditor tenure and discretionaryaccruals disappears in the years subsequent to AA’s collapse, suggesting the increase inskepticism mitigates the hazards associated with new audit engagements of small firms.This result raises the question of whether the findings under a voluntary change regime canappropriately be extended to a mandatory change setting.

When a company voluntarily changes auditors, the company can seek an auditor whoseviews on accounting and reporting matters are more consonant with those of the company.Such a change in auditor would most likely result in a lower (or the same) level of vigilanceor skepticism exhibited by the external auditor. Thus, the crux of the argument for man-datory auditor rotation (increase in skepticism) is missing in the existing research on auditorchanges. This study’s findings of an insignificant relation between short auditor tenure anddiscretionary accruals in the years subsequent to AA’s failure and a negative associationbetween ex-AA clients and discretionary accruals for smaller companies provide somesupport for mandatory auditor rotation and calls for further research in this area.

This study is subject to several limitations. First, the period under study involves somespectacular frauds (e.g., Enron and WorldCom) and one of the most significant accountingreforms (Sarbanes-Oxley Act of 2002) in history. The results documented in this time periodmay not extend to a more subdued environment. Second, I am only able to examine twoyears after the failure of AA. The actions of the new auditors of ex-AA companies maybe influenced by the negative publicity and the condemnation of AA during this time period.This raises the question of whether the relation between ex-AA clients and discretionaryaccruals results from an increase in skepticism and/or from a negative perception of AA.The lack of results for larger companies along with finding a decline in discretionary

66 Nagy


accruals for all observations suggests the former. Third, Kothari et al. (2005) suggest thatdiscretionary accrual models may be misspecified due to the likelihood of discretion-ary accruals being correlated with company performance. Although the results of theperformance-matched sample analysis are consistent with the results presented in Table 3,the potential for model misspecification continues to exist. Last, although this study moredirectly tests the impact of mandatory auditor change, it is performed under a quasi-mandatory change environment that differs from a true mandatory auditor change environ-ment. For example, unlike a true mandatory rotation environment, all the forced changesin this study’s setting were from one firm (AA) and resulted from an indictment and con-viction against that firm. Also, unlike a true mandatory rotation regime, there is no pre-determined length of tenure for the auditors succeeding AA. A predetermined tenure periodwould limit the expected future annuities from clients and, in turn, would lessen the amountsof client bargaining power. However, such a restriction may also negate the auditors’ in-centive to provide high-quality audits for the purpose of maintaining the client engagementinto the future. Although data from a mandatory auditor rotation environment is scarce atthe moment, further research is clearly needed on the effect that such an environment wouldhave on audit quality.

REFERENCESAiken, L., and S. West. 1991. Multiple Regression: Testing and Interpreting Interactions. London,

U.K.: Sage Publications Ltd.American Institute of Certified Public Accountants (AICPA). 1992. Statement of Position: Regarding

Mandatory Rotation of Audit Firms of Publicly Held Companies. New York, NY: AICPA.Balsam, S. 2004. The effect of Andersen’s demise on earnings management. Working paper, Temple

University.Bartov, E., F. Gul, and J. Tsui. 2000. Discretionary-accruals models and audit qualifications. Journal

of Accounting and Economics 30 (3): 421–452.BDO Seidman LLP. 2003. Comment letter on the SEC’s proposed rules on auditor independence. File

No. S7-49-02. January 13. New York, NY: BDO Seidman.Becker, C., M. DeFond, J. Jiambalvo, and K. Subramanyam. 1998. The effect of audit quality on

earnings management. Contemporary Accounting Research 15 (1): 1–24.Carcello, J., and A. Nagy. 2004a. Client size, auditor specialization and fraudulent financial reporting.

Managerial Auditing Journal 19 (5): 651–668.———, and ———. 2004b. Audit firm tenure and fraudulent financial reporting. Auditing: A Journal

of Practice & Theory (September): 55–69.Casterella, J., J. R. Francis, B. L. Lewis, and P. L. Walker. 2004. Auditor industry specialization,

client bargaining power, and audit pricing. Auditing: A Journal of Practice & Theory (March):123–140.

Clapman, P. C. 2003. Comment letter on the SEC’s proposed rules on auditor independence. File No.S7-49-02. January 13. New York, NY: TIAA-CREF.

Commission on Public Trust and Private Enterprise. 2003. Findings and Recommendations Part 2:Corporate Governance Part 3: Audit and Accounting. New York, NY: The Conference Board.

Dechow, P., R. Sloan, and A. Sweeney. 1995. Detecting earnings management. The Accounting Review70: 193–225.

DeFond, M., and K. R. Subramanyam. 1998. Auditor changes and discretionary accruals. Journal ofAccounting and Economics 25: 35–67.

Francis, J., and D. Simon. 1987. A test of audit planning in the small-client segment of the U.S. auditmarket. The Accounting Review 62 (January): 145–157.

———, E. Maydew, and H. Sparks. 1999. The role of Big 6 auditors in the credible reporting ofaccruals. Auditing: A Journal of Practice & Theory (Fall): 17–34.



Geiger, M. A., and K. Raghunandan. 2002. Auditor tenure and audit reporting failures. Auditing: AJournal of Practice & Theory (March): 67–78.

Ghosh, A., and D. C. Moon. 2003. Does auditor tenure impair audit quality? Working paper, Officeof Economic Analysis, Securities and Exchange Commission.

Guay, W., S. Kothari, and R. Watts. 1996. A market-based evaluation of discretionary accrual models.Journal of Accounting Research 34: 83–105.

Gujarati, D. N. 1995. Basic Econometrics. 3rd edition. New York, NY: McGraw-Hill.Heninger, W. G. 2001. The association between auditor litigation and abnormal accruals. The Ac-

counting Review 76 (January): 111–126.Hills, R. M. 2002. Oversight Hearing on: Accounting and Investor Protection Issues Raised by Enron

and Other Public Companies. Senate Committee on Banking, Housing, and Urban Affairs.107th Cong., 2nd sess. February 12. Washington, D.C.: Government Printing Office.

Hribar, P., and D. W. Collins. 2002. Errors in estimating accruals: Implications for empirical research.Journal of Accounting Research (March): 105–134.

Imhoff, E. 2003. Accounting quality, auditing, and corporate governance. Accounting Horizons (Sup-plement): 117–128.

Johnson, V. E., I. K. Khurana, and J. K. Reynolds. 2002. Audit-firm tenure and the quality of financialreports. Contemporary Accounting Research (Winter): 637–660.

Jones, J. J. 1991. Earnings management during import relief investigations. Journal of AccountingResearch (Autumn): 193–228.

Klein, A. 2002. Audit committee, board of director characteristics, and earnings management. Journalof Accounting and Economics 33 (3): 375–400.

Kothari, S. P., A. Leone, and C. Wasley. 2005. Performance matched discretionary accrual measures.Journal of Accounting and Economics 39 (1): 163–197.

Krishnan, J. 1994. Auditor switching and conservatism. The Accounting Review 69: 200–215.McKeown, J. C., J. Mutchler, and W. Hopwood. 1991. Towards an explanation of auditor failure to

modify the audit opinions of bankrupt companies. Auditing: A Journal of Practice & Theory(Supplement): 1–13.

Myers, J., L. A. Myers, and T. C. Omer. 2003. Exploring the term of the auditor-client relationshipand the quality of earnings: A case for mandatory auditor rotation? The Accounting Review(July): 779–799.

Nelson, M., J. Elliott, and R. Tarpley. 2002. Evidence from auditors about managers’ and auditors’earnings-management decisions. The Accounting Review (Supplement): 175–202.

New York Stock Exchange (NYSE). 2003. Final NYSE Corporate Governance Rules. Available at:http: / /www.nyse.com/pdfs /finalcorpgovrules.pdf.

O’Malley, S. 2002. Oversight Hearing on: Accounting and Investor Protection Issues Raised by Enronand Other Public Companies. Senate Committee on Banking, Housing, and Urban Affairs.107th Cong., 2nd sess. March 6. Washington, D.C.: Government Printing Office.

Palmrose, Z-V. 1988. An analysis of auditor litigation and audit service quality. The AccountingReview (January): 55–73.

Sarbanes-Oxley Act. 2002. Public Law 107-204, 107th Cong., 2nd sess. July 24. Washington, D.C.:Government Printing Office.

Silvers, D. 2003. Comment letter on the SEC’s proposed rules on auditor independence. File No. S7-49-02. January 13. Washington, D.C.: AFL:CIO.

St. Pierre, K., and J. A. Anderson. 1984. An analysis of factors associated with lawsuits against publicaccountants. The Accounting Review (April): 242–263.

Teoh, S. H., and T. J. Wong. 1993. Perceived auditor quality and the earnings response coefficient.The Accounting Review (April): 346–366.

TIAA-CREF. 2004. Policy Statement on Corporate Governance. New York, NY: TIAA-CREF.U.S. General Accounting Office (GAO). 2003. Public Accounting Firms: Required Study on the Po-

tential Effects of Mandatory Audit Firm Rotation. Washington D.C.: Government PrintingOffice.

68 Nagy


Warfield, T., J. Wild, and K. Wild. 1995. Managerial ownership, accounting choices, and informa-tiveness of earnings. Journal of Accounting and Economics 20 (1): 61–92.

Zhang, P. 1999. A bargaining model of auditor reporting. Contemporary Accounting Research 16 (1):167–184.

Mandatory Audit Firm Turnover, Financial Reporting Quality, and Client Bargaining Power The Case of...

Documents

Transcript of Mandatory Audit Firm Turnover, Financial Reporting Quality, and Client Bargaining Power The Case of...