Auditor resignations and the market for audit services

This paper examines the market for audit services when the incumbent audito r of an SEC registrant has resigned from the engagement. While many previou s studies of auditor changes have examined auditor dismissals by the client , only a few studies have specifically focused on auditor resignations. Aud itor resignations constitute a unique setting because they may indicate inc reased likelihood of possible future losses to the new auditor, and provide an opportunity to test the demand-and-supply side incentives in the market for audit services. Results from analyses of 156 auditor resignations and a control sample of 3 75 auditor dismissals indicate that Big 6 firms were less likely to serve a s the successor auditor when the predecessor has resigned, after controllin g for three other factors identified as proxies for litigation risk to the auditor (client's financial stress, industry membership and proportion of t otal assets in receivables and inventory). The effects were especially pron ounced for the subset of resignees in financial stress. These results suppo rt suggestions that the implications of auditor resignations are different from auditor dismissals, and provide supporting evidence for the suggestion s that supply-side incentives should be considered in examining the market for audit services.