Accepted by Michael Willenborg. We would like to acknowledge helpful comments from Anil Arya, Anne Beatty, Theodore Burnst, Chris Hogan, Douglas Schroeder, Eric Spires, Jonathan Stoller, Gary Taylor, and Teri Ziegler. Contemporary Accounting Research Vol. 25 No. 2 (Summer 2008) pp. 567â604 Â© CAAA doi:10.1506/car.25.2.10 Contemporary Accounting Research An auditorâs resignation from an engagement creates ï¬nancial reporting uncertainties. Financial reporting uncertainties in turn potentially increase the cost of capital. If the directors hold managers responsible for the failure to satisfy auditors, we expect them to respond to the auditorâs resignation by dismissing the responsible managers and ï¬nding more competent replacements. Replacing top managers also signals investors of the directorsâ intention to restore reporting credibility. A ï¬rm that changes auditors is required to ï¬le an 8-K report with the SEC indicating whether there has been an accounting or auditing disagreement between the auditor and the managers. The 8-K must note any âreportable eventâ, that is, whether the auditor believes the clientâs internal control system is so weak as to generate unreliable ï¬nancial statements (internal control reportable events), or the representations made by managers with respect to the ï¬nancial statements are not credible, or the scope of the audit needs
Contemporary Accounting Research – Wiley
Published: Jun 1, 2008
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