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An analysis of Form 8-K disclosures of auditor changes by firms approaching bankruptcy

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The increasing rate of auditor changes is of interest to Congress and regulatory authorities (Berton 1985, 1987; Report of the National Commission on Fraudulent Financial Reporting 1987; Haskins and Williams 1990). The SEC has contended that reporting disagreements, anticipated qualifications and opinion shopping often trigger auditor switching (SEC Accounting Series Release (ASR) No. 165 1976, SEC FRR 31 1988). If auditor changes reduce user confidence, this could inhibit the flow of capital in the securities markets and increase capital costs (Knapp and Elikai 1988). In response to these concerns, the SEC amended the rules for disclosing opinion shopping (SEC FRR 31 1988) and tightened Form 8-K filing requirements for the disclosure of auditor changes by reducing the notification time from 15 calendar days to five business days (SEC FRR 34 1989).(1) Coincident with the amendment of these filing requirements, the SEC Practice Section of the AICPA enacted rules that require its members to notify the SEC Office of the Chief Accountant within five business days of resigning or being dismissed from an audit, even if the registrant fails to report the auditor change on time. Although these actions are intended to give auditors greater independence in confronting clients, 8-K reports, in general, have been criticized for not being particularly informative (McConnell 1984; Dye 1991).

The Form 8-K ("Current Report") is intended to provide timely reporting of material current events. Unlike Forms 10-K and 10-Q which allow for automatic filing extensions under Rule 12b-25 of the SEC Act of 1934, the Form 8-K has no such provision.(2) The absence of any extension suggests that compliance with the 8-K disclosure requirement is viewed as critical and "in the public interest." In the case of auditor changes in particular, the SEC has shortened the filing period twice "in order to provide...