Is Auditor Switching Associated with Delayed Accounting Recognition of Bad News‪?‬

ABSTRACT We study the association between auditor switching and the delayed accounting recognition of bad news about net income. Using a nonparametric sign test and a test of proportions, we analyze 305 auditor switches which occurred during the event period 1976 to 1994, a period which predated a significant increase in the number of financial-statement restatements (General Accounting Office 2002). The results (null hypothesis rejected at z 5 for each test) suggest that some association exists between the fact of auditor switching (whether reported as resignation or dismissal) and the occurrence of decreases in net income from the year preceding the auditor switch (t-1) to the year following the auditor switch (t+1).