An Examination Of The Auditor-to-client Revolving Door, The Quality Of The Accounting Information And Risk-taking Of Company

Hopping to a listed Company to be a financial officer after working several yearsin an accounting firm has already become many auditors’ career planning, suchauditor-to-client employment is called “revolving door”. Governments in manycountries have signed into laws to forbid or restrict such practice, which reflected theconcerns about auditor independence and the quality of audit. But there also has thevoice that such employment won’t decrease the quality of financial report, but may havepositive effects.The concerns about the negative effect of the “revolving door” problem have manyreasons. First, the ex-auditor’s ties with current audit team make the latter less likely tochallenge the decisions of the former. Such hiring also leads to positive effects. Theformer auditors’ specialized knowledge about the client’s accounting systems andpolicies can enhance his or her ability to ensure proper accounting after hiring by theclient. On the other hand, the current auditors will be more prudent because of theprofessional reputation. Second, the ex-auditors professional knowledge of the auditmethodologies and processes may enable them to avoid the detection of other auditors.To identify the influences of such hiring practice on corporates’ accountinginformation quality and financial behavior, this paper establishes hypothesis and modelfor empirical analysis from three aspects, including earnings management level,accounting conservatism and corporate risk-taking, to exam the influence ofauditor-to-client revolving door on the companies’ earnings management, accountingconservatism and risk-taking. We find that:(1) when the ex-auditor choose the companyhe or she is going to work, there may exists the problem of “self-selection”, that is, theex-auditor is often choose the one whose financial position is sound and the futureprospects is good, but rather those have poor financial performance;(2) the earningsmanagement level of companies who hired the former auditor of extra accounting firmis significantly lower than those who haven’t, the accounting conservatism level issignificantly higher and the risk-taking level is significantly lower.In order to analysis whether the ex-auditor has incremental effect in the transverserelationship of “revolving door”, we did vertical analysis of each sample. We find that,after changing the financial officers, the earnings management level and risk-takinglevel of companies who hired the former auditor of extra accounting firm issignificantly increased; and the accounting conservatism level is slightly increased, companies who hired other individuals are otherwise. This result improves ex-auditor,at some level, has effects in increasing the quality of accounting information anddecreasing the risk-taking level.According to the research, an auditor’s acceptance of employment also may haveprovided the market with a positive signal about the company’s future. The decision theex-auditor made to attend to a client company can be deemed as the evidence that thecompany has the ability to attract high quality individuals who has the detailinformation about the company. So the participants of the capital market can judge thecompany’s quality of accounting information and financial behavior by “revolvingdoor” employment. For the listed company, they can enhance the confidence of theparticipants of the market through hiring the ex-auditor from their extra accountingfirm.Additionally, the regulars shouldn’t just forbid or restrict such employment, but toprovide guidelines.