Who will be the new auditor ?

In this paper I try to assess the factors that affect auditor choice after dismissal of the incumbent auditor. Therefore I use the information in the financial statements of Belgian companies that changed their auditor in the period from 1989 to 1994. It should however be clear that reasons for auditor choice as opposed to reasons for auditor change are the subject of this research. I build an auditor choice model that is testable with Belgian data using four theories on the choice of audit firms: agency theory, signaling theory, scale effects and insurance theory. Except for Weets and Jegers (1999) this paper is to my knowledge the first paper that attempts to test for these theories in a comprehensive model. A contribution of this paper is that I do not have to deal with confusing observations arising from the fact that clients possibly have an auditor with less than optimal audit quality because it costs too much to change. Next to that, I adapt the traditional B6/NB6-model to the fact that in Belgium the audit market can be divided into three approximately equal audit client groups: B6-clients, clients of other audit companies (OFF-clients) and clients of auditors that work alone (O-clients). My results are consistent with the existence of scale effects and referrals for companies that are part of a group of companies and the need for insurance of users of the financial statements. I cannot find evidence of auditor choice being influenced by agency costs between managers and owners and between providers of external financing and owners. Also signaling seems to have an impact on auditor choice in Belgium. The use of the B6/OFF/B6-model and the model with a continuous size measure for audit quality reveal that these models have also explanatory power in the Belgian context, and that the results of the B6/NB6-model hold for the other proxies for audit quality.

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