Regulation and Opinion Shopping: Evidence from the U.S. Broker-Dealer Industry

• In Event: Audit Opinion Shopping

Abstract

This study examines whether and how regulation affects opinion shopping in a market where incentives for independence are low. Specifically, motivated by the ongoing regulatory focus on the independence issues related to broker-dealer auditing, I examine the potential opinion shopping behavior of broker-dealers and changes in this behavior around recent regulatory interventions to broker-dealer reporting and auditing. Results suggest that broker-dealers engage in both going concern (GC) opinion shopping and internal control (IC) opinion shopping. To shed more light on the potential compromised independence, I use a shock-IV design to examine the effect of auditor switching on subsequent audit opinions. Results suggest that broker-dealers successfully lower the likelihood of receiving a GC (IC) opinion through opinion shopping. Moreover, I find that broker-dealer opinion shopping subsided to a certain extent after PCAOB assumed sole authority to the broker-dealer audit market. Results suggest that this effect is mainly driven by the elimination of the opportunity for broker-dealers to switch to a less regulated auditor. I also find that the broker-dealer opinion shopping activities has significantly reduced after the recent adoptions of new SEC rules and PCAOB attestation standards for the broker-dealer industry. However, this benefit comes at the cost of a dramatic reduction in the frequency of IC audit opinions. Further evidence from testing the association between audit opinion and FINRA enforcement actions suggests that the information value of the IC opinions has significantly decreased after the new rules and standards.

Author

• Yu Bai, University of Houston