Auditor – client match: timing of auditor change following mismatch and improvement through the change
ISSN: 0268-6902
Article publication date: 8 February 2023
Issue publication date: 22 May 2023
Abstract
Purpose
This paper aims to first investigate auditor change following mismatch by focusing on the number of times mismatch occurred prior to auditor change and on clients mismatched continuously with auditors for two or more years. Subsequently, it studies the relation of mismatch in the current year with auditor change for clients mismatched in the past year. These issues are important because of the call for regulatory intervention in auditor selection. If market forces achieve improvement in matching, then those forces should be relied upon in auditor selection.
Design/methodology/approach
This paper adapts the literature to estimate mismatch and uses logistic regressions on an auditor change model to study the timing of auditor change by mismatched clients and on a mismatch model to examine improvement in matching following auditor change.
Findings
This paper finds that the more frequent mismatches occurred in the past four years, the higher the likelihood of switching in the current year. Clients mismatched continuously for two or more years are more likely to change auditors. This paper also reports that mismatched clients who switch auditors are less likely to be mismatched again after the switch.
Research limitations/implications
Because market forces reduce mismatch through auditor change, free choice by clients and auditors should be allowed, and regulatory intervention should be introduced cautiously. As investors and other users of financial statements have an interest in seeing that clients get the appropriate auditors for the audit, they will be assured that market forces could achieve the purpose. Thus, the results of this paper address public concern in the regulatory regime and support current audit market practices.
Originality/value
Prior studies assume a one-year time frame for auditor change to follow mismatch. This paper relaxes this assumption, to better reflect audit market practices, by showing that clients who are more often mismatched with auditors or those mismatched continuously for two or more years could also change auditors. Furthermore, prior studies find that mismatching motivates auditor change, but they do not show that matching improves after the change. This paper extends the literature by shedding new light to show that auditor change improves auditor–client matching.
Keywords
Acknowledgements
The authors acknowledge helpful comments from Jie Zhou (Editor-in-Chief), Yue Li (Associate editor), two anonymous referees and the participants at the 2019 Accounting and Finance Association of Australia and New Zealand Conference as well as financial support of the Hong Kong Polytechnic University (under project number GUC96), the former institution of the authors, and Chu Hai College of Higher Education.
Data availability: Data are publicly available from sources identified in the paper.
Citation
Lai, K.-W. and Leung, P.W. (2023), "Auditor – client match: timing of auditor change following mismatch and improvement through the change", Managerial Auditing Journal, Vol. 38 No. 5, pp. 579-601. https://doi.org/10.1108/MAJ-02-2022-3457
Publisher
:Emerald Publishing Limited
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