We are proud to share that our faculty member, Robert Felix, has co-authored a new article published in Auditing: A Journal of Practice & Theory, one of the leading journals in the auditing field.
In “Avoidance of Goodwill Impairments via Auditor Choice,” Dr. Felix and his co-authors examine whether companies strategically change auditors to avoid reporting goodwill impairments. Goodwill—often one of the largest assets on a company’s balance sheet—must be tested annually for impairment. Recognizing an impairment can signal poor past investment decisions and negatively affect stock prices, executive compensation, and investor perceptions. The study asks an important question: Do firms “shop” for more lenient auditors to delay or reduce these impairment charges?
Using a sophisticated research design that compares what would likely happen if a company retained versus dismissed its auditor, the authors find evidence consistent with proactive auditor shopping. Companies that switch auditors under certain conditions are less likely to report a goodwill impairment in the year of the change and may record smaller impairments than similar firms that do not switch. However, these short-term reporting benefits come with potential costs. The study finds that investors react more negatively to certain auditor changes, and audit firms that attract more “shopping” clients face a greater likelihood of goodwill-related inspection findings from regulators.
This research contributes to ongoing policy discussions about auditor independence and regulatory oversight, particularly concerns raised by the Public Company Accounting Oversight Board and the U.S. Securities and Exchange Commission regarding auditor shopping behavior.
Dr. Felix's important work enhances our understanding of how auditor choice interacts with financial reporting decisions and highlights the broader governance implications of goodwill accounting. Congratulations to Professor Felix on this significant scholarly achievement!