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

31 Pages Posted: 20 Sep 2004

See all articles by Wallace N. Davidson

Wallace N. Davidson

Southern Illinois University at Carbondale - Department of Finance

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Peter J. DaDalt

Susquehanna University

Date Written: September 8, 2004

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

Suggested Citation

Davidson, Wallace N. and Jiraporn, Pornsit and DaDalt, Peter J., Causes and Consequences of Audit Shopping: An Analysis of Auditor Opinions, Earnings Management, and Auditor Changes (September 8, 2004). Available at SSRN: https://ssrn.com/abstract=592542 or http://dx.doi.org/10.2139/ssrn.592542

Wallace N. Davidson (Contact Author)

Southern Illinois University at Carbondale - Department of Finance ( email )

Mail Code 4626
Carbondale, IL 62901-4626
United States
618-453-1429 (Phone)
618-453-5626 (Fax)

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

Peter J. DaDalt

Susquehanna University ( email )

Selinsgrove, PA 17870
United States
5703724524 (Phone)

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