Auditor flow and financial statement comparability: Evidence from audit firm mergers in China

This study examines auditors’ dynamic role in the production of financial statement comparability from the perspective of auditor flow. For 47 mergers of audit firms in China from 1998 to 2012, we first divide pre-merger auditors into different auditor groups based on pre-merger audit firms, and then divide post-merger auditors into corresponding auditor groups. We find that, before mergers, the accrual comparability of two clients audited by different groups is lower than that of two clients audited by the same group. However, after the mergers, the accrual comparability of two clients audited by different groups is significantly increased. Meanwhile, we find that, after the merger, the accrual comparability of two old clients audited by different auditor groups is lower than that of two new clients. Our results suggest that auditor flow makes the auditor change audit style. This increases the financial statement comparability between flowing auditors’ clients and other clients in the new audit firm. Our results also suggest that it’s more difficult for flowing auditors to change their style in old clients than in new clients. Therefore, after audit flow, the comparability is lower between flowing auditors’ old clients and other old clients in the new audit firm.