The Simultaneous Relation between Auditor Switching and Audit Opinion: An Empirical Analysis

Accounting and Business Research, Vol. 26, No. 3, pp. 224-236, Summer 1996

Posted: 26 Feb 2009

See all articles by Jagan Krishnan

Jagan Krishnan

Temple University - Department of Accounting

Jayanthi Krishnan

Temple University - Department of Accounting

Ray G. Stephens

affiliation not provided to SSRN

Date Written: 1996

Abstract

Previous studies examining the relation between the audit opinion and auditor switching assume a one-way causation, with the issuance of a qualified opinion triggering a switch. However, analytical studies dealing with auditor independence issues (e.g., Magee and Tseng, 1990; Dye, 1991; Teoh, 1992) suggest an opposite causation, in which the auditor is less likely to qualify the opinion for a client who may switch auditors. Some evidence of an opposite causation is provided by Krishnan (1994), who finds that auditors treat switchers more conservatively (relative to non-switchers) in issuing the audit opinion. The causation between switching and the audit opinion is clearly important for policy decisions regarding both opinion shopping and auditor independence. In this paper, we test the two-way causation hypothesis and find evidence in support of a two-way causation. Our simultaneity-adjusted estimates confirm previous findings of a positive effect of a qualified opinion on switching (Chow and Rice, 1982; Craswell, 1988; Citron and Taffier, 1992). However, we find in addition that auditors are more likely to issue qualified opinions to switchers. This finding does not support the analytical studies cited earlier.

Keywords: Auditor Switching, Audit Opinion, Auditor Change, Simultaneous Equations

JEL Classification: C30, M40, M49

Suggested Citation

Krishnan, Jagan and Krishnan, Jayanthi and Stephens, Ray G., The Simultaneous Relation between Auditor Switching and Audit Opinion: An Empirical Analysis (1996). Accounting and Business Research, Vol. 26, No. 3, pp. 224-236, Summer 1996, Available at SSRN: https://ssrn.com/abstract=1348702

Jagan Krishnan (Contact Author)

Temple University - Department of Accounting ( email )

Fox School of Business & Management
1801 Liacorous Walk
Philadelphia, PA 19122
United States
215-204-8126 (Phone)
215-204-5587 (Fax)

Jayanthi Krishnan

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215-204-3085 (Phone)

Ray G. Stephens

affiliation not provided to SSRN ( email )

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