Lame Duck Auditors: An Effective Constraint over Management Discretion?

In this paper, we identify instances in which the auditor-client relationship has been terminated (i.e., the auditor resigns or the client dismisses the auditor) but the auditor continues to complete a subsequent quarterly review. Using discretionary accruals and earnings benchmark tests to proxy for the extent of earnings management, we contrast earnings management behavior during these “lame duck” auditor quarters with that in non-lame duck auditor quarters. Our results are inconsistent with the notion that lame duck auditors provide increased opportunity for management discretion because of reduced auditor involvement and/or effort. Instead, our results are more consistent with the argument that auditor independence is strengthened in lame duck situations because lame duck auditors appear to constrain earnings management behavior. Thus, our study may provide insights that are relevant to regulators, auditors, and other stakeholders who are interested in the factors that affect auditor independence.