Auditor Resignations and the Importance of Monitoring Client Acceptance Risk

SUMMARY: We summarize our recently published study in Accounting Horizons (Catanach et al. 2011) that examines client acceptance patterns and client outcomes following auditor resignations. We used a sample of auditor resignations to examine two issues: (1) why accounting firms assume the role of successor auditor on these presumably risky engagements, and (2) the future outcomes of clients accepted by these successor auditors. We find that smaller accounting firms accept the successor auditor role for resigned clients at a considerably greater rate than do larger firms. Additionally, resigned clients accepted by smaller firms are riskier on several dimensions than those accepted by larger firms. Furthermore, resigned clients accepted by smaller firms are associated with weaker long-term financial ratios, shorter survival tenures, and a greater likelihood of adverse outcomes relative to those accepted by larger firms. We offer related insights for practitioners.