Compliance with Auditor Change Disclosure Requirements: Theory and Empirical Tests

comply or fail to comply with mandatory disclosure requirements? We develop a model that recognizes three disclosure outcomes: compliance, intentional noncompliance, and accidental noncompliance. Our model relates disclosure outcomes to (1) a company’s disclosure compliance infrastructure, which includes internal control mechanisms and is determined by the company’s long-term incentives and resources to develop the infrastructure, and (2) disclosure disincentives that arise when disclosure of bad news is required. Tests of the model using data gathered from recently released staff letters identifying omissions in mandatory auditor change disclosures support the importance of compliance infrastructure and disincentives to disclose bad news. Less evidence is found supporting the roles of incentives and resources favoring investment in compliance infrastructure. Our model provides a framework for conceptualizing and testing other disclosure compliance decisions. Our empirical findings provide evidence of the need for regulatory monitoring of disclosure requirements and for asserting that regulations and standards based on size alone will not end accidental noncompliance