Pizhūhish/hā-yi ḥisābdārī-i mālī (Nov 2022)
Determining factors and consequences of risk perception in annual reports: Structural equation modeling approach
Abstract
Auditor switching has major implications for companies. Understanding the dynamics and determinants of auditor switching is especially important for the stakeholders. The present research investigated the financial determinants of auditor switching and the market response to it using meta-analysis. 122 articles between 1996 and 2021 were selected and reviewed. 67 articles examined the financial determinants of auditor switching and 55 articles examined its consequences as well as market reactions. Egger’s linear regression was used for data analysis and funnel plots were used to assess for potential publication bias. The results showed that return on assets and sales growth were negatively associated with auditor switching, while financial leverage, losses, market-to-book ratio, cash flow from operations, ratio of inventory to total assets, and foreign sales were positively associated with auditor switching. Regarding the consequences of auditor switching, the results showed that auditor switching is negatively associated with stock price changes, stock returns, discretionary accruals, and financial restatement, but positively associated with audit firm size and timeliness of audit reports. IntroductionIn recent years, auditor switching and its determinants have been the subject of considerable research in the auditing and accounting literature. Auditor switching as a multi-dimensional concept is affected by various factors and leads to different and sometimes opposite results. Understanding auditor switching is important as it can have major implications for audit firms, clients, clients’ stakeholders, and others. Various factors related to the audit firm and auditors can lead to auditor switching, including certain auditor and audit firm characteristics and client characteristics (e.g., financial and accounting ratios), among others.Studies on the determinants of auditor switching have reported mixed results for various reasons such as differences in sampling, statistical population, and data analysis. The present research investigates financial characteristics and accounting ratios as key factors in auditor switching. That is because these ratios provide a window into the company’s performance and have been widely used to explain various phenomena.A review of the literature reveals that auditor switching has been extensively, but studied some caveats. First, the results of these studies have been mixed. Second, to our knowledge, no study has used meta-analysis to investigate the determinants and implications of voluntary auditor switching. Third, most studies have examined the effect of auditor switching on either external or internal dynamics of the company, not both. Therefore, the present research uses meta-analysis to synthesize the evidence, identify and examine the primary determinants and implications of auditor switching, remove studies that cause bias in the results, and document the remaining factors using robust statistical methods.Auditing literature suggests that distinct aspects of accounting practices affect auditor switching by the client. First, new statements by the FASB on financial accounting standards creates new disagreements between the auditor and the client. Literature shows that auditor switching increases when a new standard is introduced, and that clients in industries that are more affected by the new standard are more likely to change audit firms if harmed. A number of studies provide more direct evidence that auditor-client disagreements lead to auditor change [18]. Other studies document a positive relationship between auditor conservatism and a company’s propensity to switch auditors [50]. Hennes et al. found that liquidity ratios (working capital to total assets; current assets to current liabilities), profitability (operating income before interest and taxes to total assets), and asset turnover (net sales divided by total assets) are lower for companies that have changed auditors. These findings support the notion that weak financial position of companies increases the likelihood of switching auditors [28].Tessema and Abou-El-Sood investigated audit rotation and information asymmetry at the international level and found that companies that periodically rotate auditors receive higher quality audits, which leads to higher trading volume and lower stock return volatility, thus reducing investors’ information asymmetry [57].Bani Mahd and Akbari found no significant relationship between the variables of Altman’s bankruptcy model and auditor switching [3]. Cameran et al. showed that companies with a high proportion of debt in their capital structure should assure creditors and bankers of their financial stability. Any change of auditor may be a concern for creditors and bankers [13]. Hudaib and Cooke investigated the effect of financial distress on auditor switching. They showed that financial distress affects audit opinion, which may in turn influence the company’s decision to change its auditor [29]. Wang et al. found a significant relationship between Altman’s z-score and auditor change [53]. Pirayesh and Ashtari investigated the relationship between auditor switching and ownership structure, and reported that auditor switching is positively associated with board independence and institutional ownership. They also found a positive, but non-significant relationship between stock returns and auditor switching in firms with independent boards [8].Based on this theoretical framework, the present research uses meta-analysis to investigate the relationship between various financial and accounting factors and auditor switching. These factors include financial leverage, return on assets, losses, sales growth, market-to-book ratio, cash flow from operations, inventory to total assets ratio, and foreign sales. 122 articles published between 1996 and 2021 are selected and reviewed, with 67 articles examining the financial determinants of auditor switching and 55 articles examining its consequences as well as market reactions. Egger’s linear regression was used for data analysis and funnel plots are used to assess for potential publication bias. The results show that return on assets and sales growth were negatively associated with auditor switching, while financial leverage, losses, market-to-book ratio, cash flow from operations, ratio of inventory to total assets, and foreign sales are positively associated with auditor switching. Regarding the implications of auditor switching, the results indicate that auditor switching is negatively associated with stock price changes, stock returns, discretionary accruals, and financial restatement, but positively associated with audit firm size and timeliness of audit reports.
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