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Former Audit Partners and Abnormal Accruals

Krishnagopal Menon and David D. Williams
The Accounting Review
Vol. 79, No. 4 (Oct., 2004), pp. 1095-1118
Stable URL: http://www.jstor.org/stable/4093087
Page Count: 24
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Former Audit Partners and Abnormal Accruals
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Abstract

Audit clients often employ a former partner of their present auditor as an officer or a director. This "revolving door" practice presents a potential threat to auditor independence. Using the Jones (1991) model to calculate abnormal accruals for firms in 1998 and 1999, we find that firms employing former partners as officers or directors report larger signed and unsigned abnormal accruals than other firms, after controlling for other factors that plausibly affect abnormal accruals. To ensure that the results are not driven by performance characteristics of the former partner firms, we construct a performance-matched control sample and obtain consistent results. We also observe a disproportionately higher (lower) proportion of former partner firms than expected just meeting (missing) analysts' earnings forecasts.

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