Auditor Distraction: An Unintended Consequence of M&As*

Abstract

We find that Mergers and Acquisitions (hereafter M&As) can cause severe distractions for audit teams of the acquirers. Distracted audit teams cause delays in the filings of annual financial reports by their other clients and are 4% more likely to lose those clients. Clients of distracted auditors exhibit lower audit quality, evidenced by higher chances of financial misstatements and shareholder class action lawsuits due to misstatement or misrepresentation of material information. The market reacts negatively to auditor distractions, suggesting a significant shareholder wealth impact. Our paper identifies a channel for M&As to create an adverse impact on firms that merely share the same auditor with the acquirer firms.