Opinion Shopping through Same-Firm Audit Office Switches

Abstract

We investigate the potential for a client to use a same-firm office switch as a mechanism for audit opinion shopping, relying on the framework developed by Lennox (2000). Opinion shopping in this context could either be informationally motivated (Dye 1991) or driven by managerial opportunism. Using U.S. data from 2000-2017, we find that client companies successfully avoid going concern audit opinions through audit office-switch decisions. More importantly, we find that successful office-level opinion shopping is more prevalent among low bankruptcy-risk client companies. We also find that successful opinion-shopping companies tend to choose audit offices with low Type I errors, and they exhibit higher subsequent earnings quality than non-successful counterparts. Overall, the evidence suggests that same-firm audit office switching is not opportunistic, but is primarily informationally motivated and improves audit quality.

Keywords: Informationally motivated opinion shopping; Going concern audit opinions; Audit office switches; Type I and Type II errors

JEL Classification: M42, M41