Do audit delays affect client retention?

Purpose - The purpose of this study is to examine whether lengthy audit delays lead to auditor changes in the subsequent year. The paper hypothesizes that a lengthy interaction between clients and their auditors reflects high audit risk factors relating to management integrity, internal controls, and the financial reporting process. It argues that auditors are more likely to drop clients with long audit delays because they would like to avoid these types of audit risks. Design/methodology/approach - Using logistic regressions, the paper first tests whether a lengthy audit delay leads to an auditor change. It then examines whether as audit delays increase, auditor changes are more likely to be downward than lateral. Findings - The results support the hypothesis that Big N auditor-client realignments occur following long audit delays. Further, as the length of the delay increases, the paper finds that there are more downward changes. Research limitations/implications - An implication of our study is that a long audit delay represents a publicly observed proxy for the presence of audit risk factors that lead to an auditor change. Practical implications - This study suggests that all else constant, investors should consider a lengthy audit delay as indicating that there has been deterioration in the quality of the client-auditor interaction. An audit delay also presents an observable proxy for successor auditors to consider while evaluating risks associated with a new client. Originality/value - The results of our study increase our understanding of how Big N auditors manage their client portfolios to mitigate their exposure to risk factors.