Auditor-client relationship, audit process and audit quality

This study examines how the auditor-client relationship affects the audit process and audit quality. Chapter 2 examines the likelihood of auditor dismissal following financial statement restatements at companies where at least one of the audit committee members works on the audit committee of another company that is audited by the same audit firm (“AC-auditor interlocking”). Empirical evidence shows that companies with AC-auditor interlocking relationships are less likely to dismiss their auditors after a restatement occurs. Further evidence suggests that interlocking companies that retain their auditors after a restatement have lower subsequent audit quality compared to interlocking companies that dismiss their auditors. These findings raise concerns about the audit committee’s role in auditor termination when audit quality is relatively low and suggest that AC-auditor interlocking may impair audit quality. Chapter 3 explores the pricing and client acceptance strategies of audit offices following litigations related to clients’ misconduct. Using a hand-collected sample of auditor litigation events, I find that audit offices involved in litigation increase their audit fees following the filing of the lawsuit. Further analyses indicate that the increase in audit fees charged by litigation offices is driven by clients’ high switching cost and low bargaining power. I also find that both litigation and non-litigation offices of audit firms involved in litigation are less likely to have new engagements following the start of the litigation, and that new engagements of litigation offices after litigation are likely to be less risky than the new engagements before litigation.