Auditor Switching as an Early-Warning Signal : Evidence from KRX Watchlist Designations of Korean Listed Firms

Key Points

• This research aims to empirically verify whether auditor switching functions as an early-warning signal for corporate financial distress in South Korea.
• Analyzed 18,108 company-year observations from KRX listed firms (2016-2024)
• Used designation as management items in the following year as the outcome variable
• Employed odds ratio analysis to assess the implications of auditor switching.
• Firms that switched auditors had a significantly higher probability of being designated as management items in the next year (OR=1.82, p=0.054).
• The predictive effect was stronger for firms with lower pre-existing financial risk (OR=3.47 vs. 1.31).
• The model including the auditor switch variable achieved an AUC of 0.799, an improvement of 5.4% over the financial variable-based benchmark (0.745).