The Relationship between Sec Comment Letters and Subsequent Auditor Dismissal

PurposeThe Securities and Exchange Commission reviews public companies' filings and sometimes issue comment letters (CL) to the company in response. Such correspondence from the SEC may cause the committee to reevaluate their auditors' expertise or performance which could prompt an auditor dismissal. We examine the nature of the relationship between the receipt of a comment letter and the auditor's subsequent dismissal.Design/Methodology/ApproachThis study employs an empirical analysis of archival data to analyze the relationship between SEC comment letters and subsequent auditor dismissal. It uses robust regression models to determine the influence and significance of the variables of interest on the likelihood of an auditor dismissal by the client.FindingsComment letters identifying accounting issues are associated with auditor dismissal. The likelihood of dismissal also increases with an increase in the number of accounting issues identified in the letters. Finally, companies appear to be more inclined to dismiss their auditors when the resolution process is longer.Practical ImplicationsGiven that auditors appear to be held accountable for how long the client takes to resolve a CL process, auditors may want to take an active role in working with clients to resolve SEC concerns in an expedited manner.OriginalityThis study builds on recent prior research that examined how investors react to CLs, how auditors respond to client CLs, how clients respond to CLs internally, and how bankers respond to customer CLs. We show that clients consider comment letters when evaluating their auditor’s performance, and this appears to have some influence on auditor dismissal decisions