Opinion Shopping through Same-Firm Audit Office Switches

60 Pages Posted: 17 Jan 2017 Last revised: 21 Jun 2019

See all articles by Feng Chen

Feng Chen

University of Toronto - Rotman School of Management

Jere R. Francis

Maastricht University

Yu Hou

Queen's University - Smith School of Business

Date Written: June 15, 2019

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

Suggested Citation

Chen, Feng and Francis, Jere R. and Hou, Yu, Opinion Shopping through Same-Firm Audit Office Switches (June 15, 2019). Available at SSRN: https://ssrn.com/abstract=2899888 or http://dx.doi.org/10.2139/ssrn.2899888

Feng Chen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Jere R. Francis

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Yu Hou

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

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