Causes and Consequences of Audit Shopping: An Analysis of Auditor Opinions, Earnings Management, and Auditor Changes

Abstract

Companies change auditors for a variety of reasons. At one end of the continuum, companies change auditors to improve operating performance. At the other, managers change auditors to enhance their own position. If auditor changes are driven by managerial opportunism, companies may increase their level of earnings management after the change. In this paper we reexamine prior research in earnings management that surround auditor changes (DeFond & Subramanyam, 1998) and extend prior work by examining earnings management and auditor changes while controlling for prior audit opinion. We find that, on average, earnings management does not increase following auditor changes. However, we do find that the level of earnings management is larger for companies that switch from Big Six to non-Big Six auditors following the receipt of a modified audit opinion from their original auditor.

Keywords: Auditor changes, auditor choice, audit quality, earnings management

JEL Classification: G34, M41, M42