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Auditors With or Without Styles? Evidence from Unexpected Auditor Turnovers

  • PCAOB (US Public Company Accounting Oversight Board) (dark gray) Image

Nov 30, 2016

In November 2016, the Public Company Accounting Oversight Board (PCAOB) released the paper "Auditors With or Without Styles? Evidence from Unexpected Auditor Turnovers" by Tai-Yuan Chen and Hong-Da Wang. The paper was presented at the PCOAB’s 2016 Conference on Auditing and Capital Markets on October 20-21, 2016.

Using unexpected auditor turnovers as a quasi-experiment, in this study we examine whether individual auditors exhibit a significant impact on audit quality. More specifically, focusing on auditor turnovers precipitated by the incumbent auditor’s sudden death or by resignation due to health issues or a career change, we investigate audit quality changes surrounding these unexpected events. While we find some evidences that unexpected auditor turnovers are associated with significant audit quality changes for non-Big 4 audit firms, this is not the case for auditor turnovers at Big 4 firms even though there are greater differences in personal characteristics between outgoing and successor auditors in Big 4 firms. This finding suggests that notwithstanding differences in auditors’ personal characteristics, standardized audit procedures and strong internal controls can constrain individual auditors in large audit firms from impacting audit quality.

To summarize, their study suggests that on average individual auditors in Taiwan do not exhibit a significant personal effect on audit quality, particularly when they work for Big 4 audit firms. As Taiwan’s audit market is very similar to that of countries such as the U.S., Canada, or Australia, with Big 4 auditors accounting for 80% of public firm auditing, their findings have important implications for other countries. Specifically, as many countries are starting to mandate identification of signing audit partner(s) in the audit report, in an effort to hold individual auditors accountable for audit outcomes, their study suggests that whether this disclosure can improve overall audit quality is open to debate, in particular for Big 4 audit firms.

Review the study on the PCAOB's website.

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