Killing two birds with one stone? Auditor choice in merger & acquisitions and subsequent auditor assurance quality

Listed companies commonly appoint their incumbent annual auditors to audit a target company during a merger and acquisition (M&A). However, some companies choose an alternative auditor to perform the M&A audit. To understand the consequences of this apparently unconventional auditor choice, we argue that the acquiring company introduces competition between the M&A auditor and the annual auditor, which makes the M&A auditor incentivised to compete for the annual audit engagement, whereas the annual auditor is motivated to protect her business from rivalry. This game facilitates corporate management to gain favourable treatment from auditors both in the annual audit and in the performance commitment attestation for post-M&A periods. Using data from Chinese M&A market from 2008 to 2017, we find evidence consistent with our hypotheses. Our findings suggest that an audit client is capable of compromising external auditors’ monitoring by employing multiple auditors on various assurance services.