Do Managers Successfully Shop for Compliant Auditors? Evidence from Accounting Estimates

77 Pages Posted: 3 Jan 2019 Last revised: 9 Jan 2019

See all articles by Mark L. DeFond

Mark L. DeFond

University of Southern California - Leventhal School of Accounting

Jieying Zhang

The University of Texas at Dallas

Yuping Zhao

University of Houston

Date Written: November 27, 2018

Abstract

Existing research on opinion shopping focuses primarily on managers’ attempts to switch auditors in order to avoid the receipt of an unfavorable audit opinion. We extend this literature by examining whether managers successfully shop for auditors who will allow questionable accounting practices, as evidenced by opportunistic changes in accounting estimates following auditor switches. Using manually collected data from SEC filings, we find an increase in the frequency and magnitude of discretionary income-increasing changes in accounting estimates (DICE) following auditor switches. We further find that companies reporting DICE following an auditor switch are more likely to subsequently restate earnings downward, receive fewer goingconcern opinions, experience lower abnormal stock returns in the years following the switch, and tend to switch auditors during the fourth quarter or following a disagreement with the predecessor auditor. These findings provide ex-post evidence that managers successfully shop for more lenient auditors. We also find that managers’ switch decisions maximize the ex-ante likelihood of reporting income-increasing changes in estimates, and that companies are more likely to switch to auditors whose clients have a greater likelihood of reporting income-increasing changes in estimates. Taken together, we provide both ex-ante and ex-post evidence that auditor-switch companies shop for compliant auditors that will allow the use of opportunistic accounting that meets management’s reporting objectives.

Keywords: opinion shopping, opportunistic changes in accounting estimates, auditor switches, earnings management, financial reporting quality

JEL Classification: M40, M41, M42, M48

Suggested Citation

DeFond, Mark and Zhang, Jieying and Zhao, Yuping, Do Managers Successfully Shop for Compliant Auditors? Evidence from Accounting Estimates (November 27, 2018). European Corporate Governance Institute (ECGI) - Law Working Paper No. 432/2018. Available at SSRN: https://ssrn.com/abstract=3309678 or http://dx.doi.org/10.2139/ssrn.3309678

Mark DeFond (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Accounting Building, Room 206
Los Angeles, CA 90089-0441
United States
213-740-5016 (Phone)
213-747-2815 (Fax)

Jieying Zhang

The University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States

Yuping Zhao

University of Houston ( email )

334 Melcher Hall
Houston, TX 77204
United States
713-743-2166 (Phone)
713-743-4828 (Fax)

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