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Strategic auditor switch and financial distress prediction-empirical findings from the TSE-listed firms

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  • Ching-Lung Chen
  • Gili Yen
  • Fu-Hsing Chang

Abstract

Out of reputation and audit risk considerations, the incumbent auditor may not be willing to accommodate the unreasonable request from the client with deteriorating financial conditions. On the other hand, the client may switch the auditor to solicit a clean audit opinion from the successive auditor. Viewed from such a perspective, the main proposition is that firms with auditor change subsequently have a higher probability of incurring financial distress. The main proposition has gained strong empirical support in alternative estimation models. The authors therefore conclude that the incorporation of the variable 'auditor change' can greatly enhance the predictive power of previous financial distress prediction models.

Suggested Citation

  • Ching-Lung Chen & Gili Yen & Fu-Hsing Chang, 2009. "Strategic auditor switch and financial distress prediction-empirical findings from the TSE-listed firms," Applied Financial Economics, Taylor & Francis Journals, vol. 19(1), pages 59-72.
    • Handle: RePEc:taf:apfiec:v:19:y:2009:i:1:p:59-72
    DOI: 10.1080/09603100701222259
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    Cited by:

    1. Campa, Domenico & Camacho-Miñano, María-del-Mar, 2015. "The impact of SME’s pre-bankruptcy financial distress on earnings management tools," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 222-234.
    2. Piñeiro Sánchez Carlos & Llano Monelos Pablo De & Rodríguez López Manuel, 2013. "A parsimonious model to forecast financial distress, based on audit evidence," Contaduría y Administración, Accounting and Management, vol. 58(4), pages 151-173, octubre-d.
    3. Campa, Domenico, 2019. "Earnings management strategies during financial difficulties: A comparison between listed and unlisted French companies," Research in International Business and Finance, Elsevier, vol. 50(C), pages 457-471.
    4. Eric Séverin & David Veganzones, 2021. "Can earnings management information improve bankruptcy prediction models?," Annals of Operations Research, Springer, vol. 306(1), pages 247-272, November.
    5. Berrill, Jenny & Campa, Domenico & O'Hagan-Luff, Martha, 2021. "Firm diversification and earnings management strategies: European evidence," International Review of Financial Analysis, Elsevier, vol. 78(C).

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