Auditor Turnover and the Likelihood of Future Accounting Litigation

Abstract

This paper investigates whether the type of auditor turnover (resignation vs. dismissal) is associated with the likelihood of the client firm being involved in future accounting-related litigation after the auditor turnover.

The evidence shows a statistically significant association between auditor resignations and future accounting-related litigation. This research has market implication for potential investors due to negative impact on a shareholder’s financial position. The research also has practical implications for the accounting industry in terms of legal consequences and assessing audit risk for potential successor auditors because of the negative consequences (financial and nonfinancial) of being involved in future accounting-related litigation.