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Does Opinion Shopping Impair Auditor Independence and Audit Quality?

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  • TONG LU

Abstract

This study investigates how companies' threats to dismiss auditors and their engagement in opinion shopping influence auditor independence and audit quality, which in turn affect misstatements in financial statements. It also examines how outsiders' reactions to auditor switching influence opinion shopping. The results indicate that neither the predecessor auditor's nor the successor auditor's independence is compromised by dismissal threats and opinion shopping. Further, the successor auditor's audit quality exceeds the predecessor auditor's audit quality. In addition, auditor switching decreases potential understatements and increases potential overstatements in financial statements, and the capital market's and the successor auditor's reactions to auditor switching reduce the benefits of opinion shopping to companies. Additionally, the study sheds some light on the potential effects of both the Sarbanes‐Oxley's restriction on non‐audit services and mandatory auditor rotation or retention. The paper also derives a rich set of empirical implications.

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  • Tong Lu, 2006. "Does Opinion Shopping Impair Auditor Independence and Audit Quality?," Journal of Accounting Research, Wiley Blackwell, vol. 44(3), pages 561-583, June.
    • Handle: RePEc:bla:joares:v:44:y:2006:i:3:p:561-583
    DOI: 10.1111/j.1475-679X.2006.00211.x
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    References listed on IDEAS

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    1. Dye, Ronald A., 1991. "Informationally motivated auditor replacement," Journal of Accounting and Economics, Elsevier, vol. 14(4), pages 347-374, December.
    2. Teoh, Sh, 1992. "Auditor Independence, Dismissal Threats, And The Market Reaction To Auditor Switches," Journal of Accounting Research, Wiley Blackwell, vol. 30(1), pages 1-23.
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    Cited by:

    1. Beatriz García Osma & Belén Gill de Albornoz Noguer & Elena De las Heras Cristobal, 2016. "Opinion shopping: Partner versus firm-level evidence," Working Papers. Serie EC 2016-02, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    2. Griffin, Paul A. & Lont, David H., 2011. "Audit fees around dismissals and resignations: Additional evidence," Journal of Contemporary Accounting and Economics, Elsevier, vol. 7(2), pages 65-81.
    3. Xingqiang Du & Liang Xiao & Yingjie Du, 2023. "Does CEO–Auditor Dialect Connectedness Trigger Audit Opinion Shopping? Evidence from China," Journal of Business Ethics, Springer, vol. 184(2), pages 391-426, May.
    4. Pei-Cheng Liao & Suresh Radhakrishnan, 2020. "Auditors’ Liability to Lenders and Auditor Conservatism," Management Science, INFORMS, vol. 66(8), pages 3788-3798, August.
    5. Krista Fiolleau & Kris Hoang & Karim Jamal & Shyam Sunder, 2013. "How Do Regulatory Reforms to Enhance Auditor Independence Work in Practice?," Contemporary Accounting Research, John Wiley & Sons, vol. 30(3), pages 864-890, September.
    6. Fang, Junxiong & Sami, Heibatollah & Zhou, Haiyan, 2023. "Do sanctioned audit firms strive to restore their damaged reputation under imperfect institutional settings?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 50(C).
    7. Kwang Wuk Oh & Seok Woo Jeong & Seon Mi Kim & Seung Weon Yoo, 2017. "The Effect of IPO Risks on Auditors’ Decisions: Auditor Designation Case," Australian Accounting Review, CPA Australia, vol. 27(4), pages 421-441, December.
    8. Wendy Green & Robert Czernkowski & Yi Wang, 2009. "Special treatment regulation in China: potential unintended consequences," Asian Review of Accounting, Emerald Group Publishing Limited, vol. 17(3), pages 198-211, September.
    9. Emad Noureldeen & Mohamed Elsayed & Ahmed A. Elamer & Jianming Ye, 2024. "Two-tier board characteristics and expanded audit reporting: Evidence from China," Review of Quantitative Finance and Accounting, Springer, vol. 63(1), pages 195-235, July.
    10. Schneider, Arnold, 2015. "Does information about auditor switches affect investing decisions?," Research in Accounting Regulation, Elsevier, vol. 27(1), pages 39-44.
    11. Sean Flynn & Andra Ghent, 2018. "Competition and Credit Ratings After the Fall," Management Science, INFORMS, vol. 64(4), pages 1672-1692, April.
    12. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    13. Anandarajan, Asokan & Kleinman, Gary & Palmon, Dan, 2012. "Is non-audit services a suitable proxy for auditor independence in the post-SOX period?," Research in Accounting Regulation, Elsevier, vol. 24(2), pages 105-111.

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