THE EFFECT OF SEC SANCTIONS ON AUDITOR SWITCHES (AUDITOR REGULATION, CLIENT REACTION)

This dissertation reports a study of potential changes in clients' auditor selection decisions following Securities and Exchange Commission (SEC) announcements of the results of investigations of possible audit failures. The study focused on several aspects of possible client reactions. In addition to investigating whether client companies might exhibit a general pattern of auditor choice changes following SEC announcements, the research examined potential differences in reactions related to client company size, the severity of the penalty imposed by the SEC, and the decade in which the announcement was made.; The data base consisted of a list of 6,117 client companies that changed auditors between 1972 and 1986. The tests compared auditor switches in the twelve or eighteen month period before each SEC announcement with those in the corresponding period after the announcement. Tests were conducted both at the individual event level and for combinations of events.; The data did not exhibit any consistent, systematic pattern of responses by client companies to SEC announcements. Differences between switches before and after announcements were about evenly divided between increases and decreases. However, analysis of the individual events revealed that more events showed statistically significant differences than would be expected by chance. It appears, therefore, that while reactions to SEC announcements are not uniform, the announcements may contain information that clients find useful in their selection decisions.; Neither size nor severity-of-sanctions comparisons yielded clear evidence of differing effects on client decisions. The division according to decade produced the only statistically significant cross-sectional results. Individual event results confirm that the SEC announcements issued during the 1980's were accompanied by declines in client gains (switches to the auditor) by the affected auditors, whereas in the 1970's the direction of differences varied from event to event.