Auditors as monitors: evidence from discretionary accruals of Laventhol and Horwath clients

Abstract

Purpose – This paper aims to provide evidence on the hypothesis that auditors differ in how they constrain discretionary accruals (DAs) of their clients. The paper seeks to analyze changes in DAs for clients of Laventhol and Horwath associated with the appointment of a successor auditor. Design/methodology/approach – The study uses regression and archival data to separate a firm's accounting accruals into discretionary and non-DAs. The study then examines changes in a firm's DAs associated with a change in auditors. Findings – Replacing LH with a new auditor resulted in a statistically significant decrease in DAs. This result is contrary to prior research and could be due to the prior research using voluntary auditor changes where variables such as financial distress and opinion shopping could drive the results. Originality/value – The study provides results that differ from prior research. This study shows that the auditor change is associated with a systematic decline in the level of a firm's DAs. The results could be due to the forced nature of this auditor change as opposed to voluntary auditor changes used in prior research.Auditors, Bankruptcy, Financial management