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

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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).

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Demonstrates the predictive effectiveness of auditor switching in firms, highlighting its implications for stakeholders.

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Seo et al. (2026) studied this question.

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