Resumen de Auditor’s Downward Switch, Governance, and Accounting Conservatism

Santanu Mitra, Bikki Jaggi, Talal Al-Hayale

• This study demonstrates that the firms that switch from Big N auditors to non-Big N auditors use less accounting conservatism in the post-switch year relative to the year before switch. Our analyses further show that the decline in conservatism is mainly evident for the firms that switch to smaller non-Big N auditors, but not when the firms switch from Big N to second-tier national auditors, such as BDO Seidman and Grant Thornton (BDO/GT). In addition, we find that the firms experiencing switches from Big N to smaller non-Big N firms exhibit less accounting conservatism in the post-switch year when they have relatively weaker corporate governance. We also observe that both auditor resignation and auditor dismissal events lead to a significant decline in post-switch conservatism, especially among the firms with weaker governance mechanisms that experience switch to smaller non-Big N auditors. Furthermore, the smaller and younger firms with weaker governance adopt less conservatism in the post-switch period relative to the pre-switch period. Our findings complement prior research in this area and have policy implications that the quality of audits provided by smaller auditors may continue to remain a matter of concern in the post–Sarbanes–Oxley Act of 2002 (SOX) and post–Public Company Accounting Oversight Board (PCAOB) periods, especially when the firms have weaker governance.