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The Effects of Regulated Auditor Tenure on Opinion Shopping: Evidence from the Korean Market

Author

Listed:
  • Beu Lee

    (Department of Accounting and Finance, College of Business, Texas A&M University-San Antonio, San Antonio, TX 78224, USA)

  • George Gamble

    (Department of Accountancy and Taxation, C.T. Bauer College of Business, University of Houston, Houston, TX 77004, USA)

  • Thomas Noland

    (Department of Accountancy and Taxation, C.T. Bauer College of Business, University of Houston, Houston, TX 77004, USA)

  • Yuping Zhao

    (Department of Accountancy and Taxation, C.T. Bauer College of Business, University of Houston, Houston, TX 77004, USA)

Abstract

We examine the impact of regulated auditor tenure on the shopping for favorable audit reports. We predict that these regulations may affect auditors’ willingness to acquiesce and clients’ incentives to engage in opinion shopping. We draw from the unique Korean setting where both mandatory audit firm retention and mandatory rotation were implemented for all public firms in a staggered manner. Based on hand-collected audit reports, we identify harmful language in explanatory paragraphs. We define favorable audit reports as those with unqualified opinions and without any harmful explanatory language. We find that opinion shopping for favorable audit reports appears to subside after mandatory retention but increases after mandatory rotation, with the positive impact of mandatory retention offset by the negative impact of mandatory rotation. We add to the literature by examining the impact of regulated auditor tenure on opinion shopping and highlighting the potential unintended consequences of these regulatory attempts.

Suggested Citation

  • Beu Lee & George Gamble & Thomas Noland & Yuping Zhao, 2024. "The Effects of Regulated Auditor Tenure on Opinion Shopping: Evidence from the Korean Market," JRFM, MDPI, vol. 17(11), pages 1-28, November.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:11:p:503-:d:1517086
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    References listed on IDEAS

    as
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    4. Dye, Ronald A., 1991. "Informationally motivated auditor replacement," Journal of Accounting and Economics, Elsevier, vol. 14(4), pages 347-374, December.
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    6. Lu, Tong & Sivaramakrishnan, K., 2009. "Mandatory audit firm rotation: Fresh look versus poor knowledge," Journal of Accounting and Public Policy, Elsevier, vol. 28(2), pages 71-91.
    7. Kee‐Hong Bae & Jun‐Koo Kang & Jin‐Mo Kim, 2002. "Tunneling or Value Added? Evidence from Mergers by Korean Business Groups," Journal of Finance, American Finance Association, vol. 57(6), pages 2695-2740, December.
    8. Ahsan Habib, 2013. "A meta-analysis of the determinants of modified audit opinion decisions," Managerial Auditing Journal, Emerald Group Publishing, vol. 28(3), pages 184-216, March.
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