Do Firms Successfully Shop for Preferred Accounting Treatment? Evidence from Changes in Accounting Estimates

• In Event: Non-Auditing Services / Opinion-Shopping

Abstract

Prior studies fail to find that firms are less likely to receive going-concern opinions after they switch auditors. This paper examines whether firms obtain more income-increasing changes in accounting estimates after they switch auditors. We first show that obtaining income-increasing changes in accounting estimates plays an important role in firms’ decision to switch auditors. Specifically, we find that the auditor switch decision increases firms’ expected chance of having income-increasing changes in estimates, and firms are more likely to switch to auditors that are more lenient than the incumbent auditor towards income-increasing changes in estimates. We then show that firms successfully shop for preferred accounting treatment. That is, switchers are more likely to make income-increasing changes in estimates after the switch. Finally, we document that such shopping lowers audit quality. We find that switchers that make income-increasing changes in estimates are more likely to meet/beat analyst forecasts, less likely to receive going-concern opinions, and have less persistent earnings after the switch. Our study identifies an alternative shopping venue and provides new evidence on successful opinion shopping.

Authors

• Jieying Zhang, University of Texas at Dallas

• Yuping Zhao, University of Houston-Houston