Determinants and consequences of auditor resignations and dismissals: The effect of SOX

The post-SOX time period offers a unique setting to explore whether auditors have a heightened sensitivity to internal control risk and auditor independence. I examine a sample of auditor changes prior and subsequent to SOX to test whether risks motivate auditors to change their client portfolios. Regarding the determinants of auditor resignations, results indicate SOX significantly increased the litigation risk association with resignations, increased the audit fees prior to a resignation and decreased the going concern opinion association with resignations. Results indicate that SOX did not impact auditor resignation associations with internal control deficiencies, non-audit service fee ratios or long auditor tenure. Regarding the consequences of auditor changes, results indicate SOX impacted successor auditor quality declines by significantly increasing their association with non-audit service fee ratios and audit fees. Interestingly, results indicate a post-SOX increase in larger firms changing to lower quality successor auditors. Finally, I examine the market reaction to SEC Form 8-K auditor change disclosures. Results indicate the market reacts negatively to disclosures of reliability issues in the pre-SOX period and negatively to disclosures of auditor resignations, internal control deficiencies, and material weakness internal control deficiencies in the post-SOX period. Overall, results are consistent with the Sarbanes-Oxley Act impacting auditor client portfolios, although via risk factors other than internal control and independence issues.