* Corresponding author. Tel.: 213 740 5017; fax: 213 747 2815; e-mail: krs@almaak.usc.edu Journal of Accounting and Economics 25 (1998) 35 — 67 Auditor changes and discretionary accruals Mark L. DeFond, K.R. Subramanyam* Leventhal School of Accounting, University of Southern California, Los Angeles, CA 90089-1421, USA Received 1 February 1997; received in revised form 1 August 1998 Abstract In a sample of auditor change firms we find that discretionary accruals are income decreasing during the last year with the predecessor auditor and generally insignificant during the first year with the successor. In addition, the income decreasing discretionary accruals are concentrated among firms expected to have greater litigation risk. These findings are consistent with litigation risk concerns providing incentives for auditors to prefer conservative accounting choices, and with managers dismissing incumbent audi- tors in the hope of finding a more reasonable successor. However, we cannot rule out financial distress as a potential alternative explanation for our results. ( 1998 Elsevier Science B.V. All rights reserved. JEL classification: L84; M40; M41 Keywords: Auditing; Auditor-client realignment; Auditor changes; Discretionary ac- cruals; Litigation risk; Auditor conservatism; Earnings management 1. Introduction Auditor changes have received considerable attention from both regulators and academics. The regulators’ interests are due to a concern that auditor changes are motivated by management opportunism. For example, the Secur- ities and Exchange Commission (SEC) states it is concerned with auditor changes that involve “ 2 the search for an auditor willing to support a proposed accounting treatment designed to help a company achieve its reporting objectives even though that treatment might frustrate reliable reporting” 0165-4101/98/$ — see front matter ( 1998 Elsevier Science B.V. All rights reserved. PII:S0165-4101(98)00018-4