The Impact of Auditor Switch on the Association between Litigation Risk and Audit Quality

We show that the relationship between litigation risk and audit quality is conditional on whether there is an auditor switch upon an increase in litigation risk. Auditors who took over a client before its imminent litigation allow more income-increasing accruals, have shorter audit lags, and issue fewer going concern opinions than those who stay with risky clients. Moreover, the fees of new auditors reflect a risk premium as these fees are positively related to ex post auditor litigation. In contrast, auditors who stay with risky clients charge higher audit fees and reduce non-audit services, and the audit fees reflect effort as they are negatively related to auditor litigation. In summary, we find that auditor switch leads to different relation between litigation risk and audit quality.