Out of reputation and audit risk considerations, the incumbent auditor may not be willing to accommodate the unreasonable request from the client with deteriorating financial conditions. On the other hand, the client may switch the auditor to solicit a clean audit opinion from the successive auditor. Viewed from such a perspective, the main proposition is that firms with auditor change subsequently have a higher probability of incurring financial distress. The main proposition has gained strong empirical support in alternative estimation models. The authors therefore conclude that the incorporation of the variable ‘auditor change’ can greatly enhance the predictive power of previous financial distress prediction models.
