We investigate the association between factors related to client and auditor characteristics and auditor switches by companies listed on the Tehran Stock Exchange (TSE) because government policy and recent regulatory changes resulted in a rapid increase in competition in the audit and capital markets. The regulatory changes, which occurred in 2001, brought about significant changes in the audit market leading to a substantial increase in the number of audit firms auditing listed companies and auditor switches. In addition, as part of government policy, there were substantial transfers of stock in Iranian companies from the public to the private sector, resulting in greater diffusion of shareholders and increased information asymmetry. These changes create a natural experiment to examine the effects of increased auditor competition, changes in agency risks due to privatization, and other factors that impact on auditor selection. We find that increased competition, auditor-client alignment, changes in CEO, earnings management, and qualified audit opinions due to auditor-management conflicts are significantly associated with auditor switching by companies listed on the TSE. The findings support the premise that increased competition in the audit market increases auditor switching. Prior research has only examined conditions of decreasing competition in the audit market so our study makes a valuable contribution in this regard. We do not find a signification relation between privatization and auditor switching. However, very few of the companies in our sample were transferred out of government control during our sample period. We also did not find a significant relation between ownership concentration and auditor switching. The high levels of government ownership and control in Iranian companies may have influenced this result.

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