Do Companies Shop for Auditors to Conceal Misstatements? Evidence from the Termination of Auditor-Client Engagement during the Misstatement Period

• In Event: Audit Opinion Shopping

Abstract

We show that companies that misstate their financial statements successfully engage in auditor shopping to conceal the misreporting; their misstatements would have been discovered faster had they made opposite replace/retain auditor decisions. We also find that the engagement in auditor shopping leads to longer and more severe misstatements. The practice of auditor shopping is more prevalent when the level of competition in the audit market is high. In an extended analysis we find that the presence of a financial expert on the audit committee curbs auditor shopping, while having more powerful CEO facilitates auditor shopping. Finally, the decision to engage in auditor shopping bares detrimental labor market consequences to the CFO, as the likelihood of CFO turnover after the restatement is substantially higher for companies involved in auditor shopping during the misstatement. Overall, our study broaden the literature on opinion shopping by demonstrating that the motivation for an opportunistic auditor dismissal/retention extends beyond opinion shopping.

Authors

• Zvi Singer, HEC Montreal

• Jing Zhang, University of Alabama in Huntsville