Determinants and market consequences of audit partner changes after restatements

Abstract

We explore the determinants and consequences of a previously unexamined action that companies may take in response to a restatement: although they retain the same audit firm, 24 percent of companies prematurely change audit partners following a restatement. Relative to changing audit firms in response to a restatement, premature audit partner changes are more likely when the company is economically important to the auditor but are less likely after severe restatements and as auditor tenure increases. Our findings draw attention to the possibility that economically important clients may be able to apply pressure to audit firms to change their engagement partners. Finally, we fail to find evidence of a market response to the disclosure of audit partner changes, suggesting that this action does not successfully restore the reputation of the restating company. The lack of market response in the restatement setting contributes to a growing literature which calls into question the informativeness of audit partner identity, contradicting the PCAOB’s rationale for Form AP.