Whistleblowing allegations and auditor resignation: should I stay or should I go?

Purpose - Although regulations to prevent financial wrongdoing exist in the USA, whistleblowing (WB) remains important in deterring unethical corporate behavior. The purpose of this study is to address the tension in the audit continuance literature by examining auditor resignations following a WB allegation. Design/methodology/approach - WB allegation data is obtained from the US Occupational Safety and Health Administration and through manually collecting media-reported WB allegations. The authors use a difference-in-difference research design to examine auditor resignations around WB allegations. The test sample is compared against a propensity-score-matched (PSM) sample of control firms. Findings - Auditors are significantly less likely to resign from an engagement following a WB allegation. Auditors prefer to increase their fees and continue with the engagement rather than resign, even when faced with the heightened risks posed by WB allegations. These findings suggest that auditors value the ability to earn a consistent stream of increased revenue from their clients, in agreement with the risk-spreading theory of audit continuance literature. Originality/value - To the best of the authors’ knowledge, this is the first study that examines auditor resignations following a WB allegation. These findings contribute to the existing WB and auditing literature and add to the auditor acceptance/continuance literature. The findings are meaningful to shareholders, managers, researchers and especially to standard setters who are tasked with ensuring that auditors provide assurances about the accuracy of financial statements.