The Impact of Auditor Switch and Change in Audit Quality on Quality of Financial Information
Date Issued
2008
Date
2008
Author(s)
Chao, Po-Sheng
Abstract
This study examines the impact on the financial information quality from both information perspective and measurement perspective for 30 publicly traded Taiwan companies undergoing auditor switches during year 2001 to 2005. The audit quality change between the predecessor and the successor audit firm is also examined. The audit quality is measured as increase if the company changed the auditor from non-big firms to big firms or if the company changed the auditor between the same type firms but the successor auditor either is greater in size or has better expertise in auditing the industry in which the company is involved. From the information perspective, the stock market performance after the change was worse than the performance before the change, but the earnings numbers reported after the changes were inclined to reveal good news to investors, especially for those companies hiring an audit firm with lower audit quality. The ratio of earnings information value to net information value for the companies with audit firm’s audit quality decreased was also lower than that before the switch or that for the companies with audit firm’s audit quality increased. From the measurement perspective, the effectiveness of the financial information, such as equity book value and abnormal earning, in the Residual Income Model is decreased after the company switched to the auditor whose audit quality is lower. This reveals that the reported financial information might be overestimated and therefore the information quality is lower.
Subjects
Auditor Switch
Audit Quality
Information Perspective
Measurement Perspective
Financial Information Quality
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