Auditor changes and discretionary accruals

In a sample of auditor change firms we find that discretionary accruals are income decreasing during the last year with the predecessor auditor and generally insignificant during the first year with the successor. In addition, the income decreasing discretionary accruals are concentrated among firms expected to have greater litigation risk. These findings are consistent with litigation risk concerns providing incentives for auditors to prefer conservative accounting choices, and with managers dismissing incumbent auditors in the hope of finding a more reasonable successor, However, we cannot rule out financial distress as a potential alternative explanation for our results. (C) 1998 Elsevier Science B.V. All rights reserved. JEL classification: L84; M40; M41.