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The relationship between SEC comment letters and subsequent auditor dismissal

Author

Listed:
  • Baldwin, Jane
  • Blankley, Alan
  • Hurtt, David
  • MacGregor, Jason

Abstract

Section 408 of the Sarbanes-Oxley Act requires the Securities and Exchange Commission (SEC) to review issuers' disclosures, including the financial statements, on a regular and systematic basis, no less frequently than every three years. In consequence, the SEC may contact the issuer company through a comment letter identifying questions the Commission has with the issuer company's filings. Since Audit committee members tend to regard the auditors they hire to conduct the company's audit as experts in their field, unexpected correspondence from the SEC may cause the committee members to reevaluate their assumptions concerning the auditors' expertise, which could prompt an auditor dismissal. In fact, we find evidence supporting the association between receipt of a comment letter and subsequent auditor dismissal. In further analyses, we consider the effect that the severity of the comment letter has on the likelihood of dismissal. We find evidence that comment letters identifying accounting issues are associated with auditor dismissal. Further, the likelihood of dismissal increases with an increase in the number of accounting issues identified in the letters.

Suggested Citation

  • Baldwin, Jane & Blankley, Alan & Hurtt, David & MacGregor, Jason, 2025. "The relationship between SEC comment letters and subsequent auditor dismissal," Advances in accounting, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:advacc:v:69:y:2025:i:c:s088261102500046x
    DOI: 10.1016/j.adiac.2025.100851
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    References listed on IDEAS

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