The hiring of accounting and finance officers from audit firms: how did the market react?

The hiring of accounting and finance officers from audit firms: how did the market react? This study investigates the market’s reaction to companies hiring accounting and finance officers directly from their external audit firms—the auditor-to-client hiring practice referred to as the “revolving door.” The Sarbanes-Oxley Act (SOX) eliminated this hiring practice, reflecting concerns that such appointments may impair audit and financial reporting quality. However, it was also argued that companies may have benefited from hiring individuals already familiar with their systems, organization and personnel. To determine the prevalence of this hiring practice and how shareholders viewed these appointments, we examine 3-day cumulative abnormal returns around the announcements of newly appointed accounting and finance officers over the period 1985–2002. We find that the proportion of revolving door hires is relatively low (only 6.1% of all hires in our sample), but that when they did occur the market valued the revolving door appointments more positively than other appointments. Further tests reveal that the positive market reaction to revolving door appointments is driven mainly by smaller companies, and that these appointments are not associated with lower financial reporting quality when assessing subsequent discretionary accruals or the receipt of an Accounting and Auditing Enforcement Release (AAER). Overall, the low frequency of occurrence, investors’ positive perceptions, and the lack of association with deteriorated reporting quality indicate that the SOX restriction on revolving door appointments may have been unnecessary and will do little to protect shareholders. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

The hiring of accounting and finance officers from audit firms: how did the market react?

Loading next page...
 
/lp/springer_journal/the-hiring-of-accounting-and-finance-officers-from-audit-firms-how-did-6BI1kP07Ks
Publisher
Springer US
Copyright
Copyright © 2007 by Springer Science+Business Media, LLC
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-007-9047-y
Publisher site
See Article on Publisher Site

Abstract

This study investigates the market’s reaction to companies hiring accounting and finance officers directly from their external audit firms—the auditor-to-client hiring practice referred to as the “revolving door.” The Sarbanes-Oxley Act (SOX) eliminated this hiring practice, reflecting concerns that such appointments may impair audit and financial reporting quality. However, it was also argued that companies may have benefited from hiring individuals already familiar with their systems, organization and personnel. To determine the prevalence of this hiring practice and how shareholders viewed these appointments, we examine 3-day cumulative abnormal returns around the announcements of newly appointed accounting and finance officers over the period 1985–2002. We find that the proportion of revolving door hires is relatively low (only 6.1% of all hires in our sample), but that when they did occur the market valued the revolving door appointments more positively than other appointments. Further tests reveal that the positive market reaction to revolving door appointments is driven mainly by smaller companies, and that these appointments are not associated with lower financial reporting quality when assessing subsequent discretionary accruals or the receipt of an Accounting and Auditing Enforcement Release (AAER). Overall, the low frequency of occurrence, investors’ positive perceptions, and the lack of association with deteriorated reporting quality indicate that the SOX restriction on revolving door appointments may have been unnecessary and will do little to protect shareholders.

Journal

Review of Accounting StudiesSpringer Journals

Published: Jul 24, 2007

References

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create lists to
organize your research

Export lists, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off