Error Announcements, Auditor Turnover, and Earnings Management – Evidence from Germany

Abstract

This paper provides additional insights how shareholders perceive error announcements in the German enforcement system whose task is to ensure a preventive and sanctioning function via adverse publicity. Although US research provides large and unambiguous evidence of sanctions which are based on capital market reactions, but also personal consequences of responsible managers and auditors, the few studies which investigated the German enforcement system do not yield comparable results, thereby questioning its efficacy. Building on this, we investigate whether firms with error announcements exhibit higher auditor turnover than comparable non-error firms in the German setting. In addition, we investigate the impact of auditor changes on accounting quality. We find some evidence that firms with auditor changes exhibit an increase in accounting quality, which however already takes place in the gap year between error announcement and auditor change. Consequently, we interpret auditor changes serving as a ‘label’ of improved corporate governance, rather than indeed improving corporate governance.