The Effect of Lame Duck Auditors on Management Discretion : An Empirical Analysis

We identify instances in which the auditor-client relationship has been terminated but the auditor continues to complete a subsequent quarterly review. We refer to these instances as “lame duck auditor” quarters, and we contrast financial reporting quality in these quarters with that in non-lame duck auditor quarters. Using discretionary accruals and financial statement misstatements as proxies for financial reporting quality, we find that financial reporting quality is higher in lame duck auditor situations, suggesting that lame duck auditors perform more stringent quarterly reviews. We attribute these results to improvements in auditor independence and/or heighted reputation concerns. We perform a number of tests to alleviate concerns that our results are attributable to fundamental differences between clients with lame duck auditors and clients with non-lame duck auditors and to alleviate concerns that our results are attributable to changes in manager behavior rather than changes in auditor behavior. Collectively, our results provide insights that are relevant to regulators, auditors, and other stakeholders who are interested in the factors that affect auditor independence and financial reporting quality