Do companies realize operational benefits from engaging a competitor’s former auditor?

This study examines whether companies realize operational benefits from engaging a new auditor recently dismissed by a competitor. While research shows that auditors can share information across clients, there is limited research on the potential impact of auditor information spillovers on clients’ operational outcomes. I find that companies that switch to a competitor’s former auditor realize significant improvements in operating performance and that this association varies predictably with several cross-sectional factors. I also find that these improvements are driven by increases in operating margins as opposed to revenue increases and that the outcomes of these switches are influenced by characteristics of the auditors and competitor companies involved in the switches. The pattern of these findings suggests that auditors may be sharing useful information with new clients after these switches. More broadly, the results suggest that the value of an audit (auditor) extends beyond the traditional considerations of capital market participants.