Research

Auditor Fees Around Dismissals and Resignations: Additional Evidence

This paper offers new findings on the relation between auditor dismissals and resignations and audit fees. Unlike the prior research, which studies the fees of auditors after an auditor change, UC Davis Professor Paul Griffin and co-author David H. Lont from the University of Otago, Dunedin focus on audit fees before an auditor change. Their evidence shows that incumbent auditors charge unusually higher fees at least one year prior to an auditor change event. The existence of unusual fee adjustments by incumbents may serve as a precursor of such events.

In the case of dismissals, Griffin and Lont reason that if clients perceive the presence of unusually higher audit fees as an indication that their costs are excessive, this should prompt a
switch in auditors. They find evidence consistent with this view. For resignations, they interpret unusually higher incumbent fees not as a sign of client-perceived excess but as a signal by auditors that resignation companies reflect higher levels of audit risk or liability, which incumbents capture as additional fees. Eventually, however, the additional fees are insufficient, and the auditor resigns.

While these results are based mostly on the audit fee disclosures after Sarbanes-Oxley, the authors control for and find similar results for periods not dominated by the legislation. The results are similar for each of the Big 4 firms.

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