Continued Partner-Client Relation and Financial Reporting Quality

Charles J.P. Chen
City University of Hong Kong
Hong Kong, China

Xijia SU
City University of Hong Kong
Hong Kong, China

Xi Wu
Central University of Finance and Economics
Beijing, China

Abstract:
Companies have to switch their auditors when the incumbent audit firm is terminated. However, clients may choose to follow the incumbent audit partner to a new firm or select a new firm that is completely unrelated to the previous firm and/or partner. Comparing the financial reporting quality among follow clients audited by former partners, follow clients audited by unaffiliated partners, and non-follow clients over a period of five post-switch years, we find that the effect of former partner conservatism as conjectured in Blouin et al. (2007) is temporary, and former partners balance between responding to a perceived or actual increase in regulatory and/or new-firm scrutiny in the initial client-follow year and allowing follow clients to realize their expected opportunistic benefits in subsequent years. We also find corroborating evidence when comparing the sample of forced joint switches with a sample of voluntary joint switches.