Do Companies Engage in Auditor Shopping to Conceal Misreporting? Evidence from Financial Misstatements

57 Pages Posted: 18 Oct 2018

See all articles by Zvi Singer

Zvi Singer

HEC Montreal

Jing Zhang

University of Alabama in Huntsville

Date Written: October 5, 2018

Abstract

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

Singer, Zvi and Zhang, Jing, Do Companies Engage in Auditor Shopping to Conceal Misreporting? Evidence from Financial Misstatements (October 5, 2018). Available at SSRN: https://ssrn.com/abstract=3260930 or http://dx.doi.org/10.2139/ssrn.3260930

Zvi Singer (Contact Author)

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada
514-340-1847 (Phone)

Jing Zhang

University of Alabama in Huntsville ( email )

Huntsville, AL 35899
United States
2568246617 (Phone)

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