Article1981

CPA Switches and Associated Market Reactions.

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

Abstract ABSTRACT: In 1978, the Securities and Exchange Commission issued its final requirements concerning the disclosure requirements of companies that change their auditors. Along with a filing requirement for an auditor change, companies were also required to enumerate and describe disagreements they may have had with their CPAs on accounting and auditing issues in the 18 months prior to the change. To provide evidence on the existence and degree of market impact of these disclosure requirements, the behavior of stock prices of a sample of companies that switched auditors and a matched pair of control companies that did not were analyzed. Results of the study appear to be inconsistent with the SEC requirement for companies to enumerate and describe disagreements with their auditors. For the general event of auditor changes, there seems to be negative market reaction around the time of the switch; however, there is some difficulty in interpreting the motivation for this reaction.

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References

1976Corporate Forecasts of Earnings Per Share and Stock Price Behavior: Empirical Test 1974Special Information and Insider Trading 1966Market and Industry Factors in Stock Price Behavior 1975BETAS AND THEIR REGRESSION TENDENCIES 1973Evidence on the Information Content of Accounting Numbers: Accounting-Based and Market-Based Estimates of Systematic Risk 1972Investor Evaluation of Accounting Information: Some Empirical Evidence 1978Pooling vs. Purchase: The Effects of Accounting for Mergers on Stock Prices

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