Do Companies Engage in Auditor Shopping to Conceal Misreporting? Evidence from Financial Misstatements
57 Pages Posted: 18 Oct 2018
Date Written: October 5, 2018
We show that companies that misstate their financial statements, successfully engage in auditor shopping to conceal the misreporting. In other words, their misstatements would have been discovered sooner had they made an opposite ‘replace or retain’ auditor decision. The practice of auditor shopping is more prevalent when the level of competition in the audit market is high. Additional analysis shows that an audit committee with strong financial expertise appears to curb auditor shopping, whereas CEO power appears to facilitate auditor shopping. Finally, engaging in auditor shopping bears detrimental labor market consequences to the CFO, as CFO turnover after a restatement is substantially higher for companies that were involved in auditor shopping during the misstatement. Overall, our study broadens the literature on opinion shopping by demonstrating that the motivation for an opportunistic auditor dismissal/retention extends beyond shopping for a favorable audit opinion and should be of interest to regulators that continue to express concerns over this practice.
Keywords: auditor shopping, accounting misstatement discovery, audit market competition, misstatement duration, CFO turnover
JEL Classification: G38, M41, M42, M48
Suggested Citation: Suggested Citation