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Bankrupcy, auditor Switching and Audit failure: Evidence from the UK. 1987-1994

  • Clive Lennox

    (University of Bristol)

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    If a company's auditor believes that the company is likely to enter bankruptcy, the auditor is required to warn investors by giving a 'qualified' audit report. This paper investigates whether auditor switching can help explain why auditors frequently fail to warn about impending bankruptcy. The paper shows that managers use the switch decision to avoid receiving qualified reports and a switch exogenously reduces the accuracy of audit reports by replacing established incumbent auditors with less well informed new auditors. These results mean that the use of switching by managers is not necessarily contrary to investors' interests. Moreover, policies aimed at reducing managerial influence - for example, a recent EC policy proposal recommended the compulsory periodic switching of auditors - could reduce the accuracy of audit reports.

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    File URL: http://www.rhul.ac.uk/economics/Research/WorkingPapers/pdf/dpe9802.pdf
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    Paper provided by Department of Economics, Royal Holloway University of London in its series Royal Holloway, University of London: Discussion Papers in Economics with number 98/2.

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    Length: 36 pages
    Date of creation: Jul 1998
    Date of revision: Jul 1998
    Handle: RePEc:hol:holodi:9802
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