An Examination of the Terminal Year in an Auditor-Client Relationship

We examine the cost and consequences of switching auditors. Specifically, we consider several client costs (audit fees, going-concern opinions, and internal control opinions) in the last year of an audit engagement (“terminal year”). We find that outgoing auditors are more likely to charge higher au...

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Bibliographic Details
Published in:Accounting horizons 2024-06, Vol.38 (2), p.1-25
Main Authors: Aier, Jagadison K., Jones, Keith L., Lian, Qiyang, Schroeder, Joseph H.
Format: Article
Language:English
Subjects:
Audit engagement
Auditing
Auditing standards
Auditors
Audits
Client relationships
Fees & charges
Internal auditing
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Summary:We examine the cost and consequences of switching auditors. Specifically, we consider several client costs (audit fees, going-concern opinions, and internal control opinions) in the last year of an audit engagement (“terminal year”). We find that outgoing auditors are more likely to charge higher audit fees, issue more going-concern opinions, and issue more adverse internal control opinions during the terminal years of their audits. These findings suggest that outgoing auditors gain greater bargaining power, are more likely to charge for additional hours of audit work, and are less likely to yield to client pressures. Overall, our results suggest that companies face real economic costs from the outgoing auditor in addition to the start-up costs of the incoming auditor. Data Availability: Data are publicly available from sources identified in the text. JEL Classifications: G31; G32; G33; M21.
ISSN:0888-7993
1558-7975
DOI:10.2308/HORIZONS-2020-158