Internal Control Opinion Shopping: Does Initial Audit Fee Discounting Matter?

• In Event: Auditing Contexts and Issues

Abstract

Both regulators and researchers are concerned that the lowballing of initial year audit fees may impair auditor independence (U.S. Senate 1977, 2002; American Institute of Certified Public Accountants [AICPA] 1978; Securities and Exchange Commission [SEC] 2000; Huang et al. 2015). This study examines whether audit clients’ internal control opinion shopping activities are more likely to be successful when the successor auditors lowball their initial year audit fees. Using a full sample of 1,373 observations for which the client’s predecessor auditor reports an adverse SOX Section 404 internal control opinion, I find that in the following year a successor auditor that lowballs audit fees is more likely to issue a clean internal control opinion. However, a successor auditor that does not lowball audit fees still reports the presence of internal control material weaknesses (ICWs), the same as the predecessor auditor. The results hold when the predecessor auditors are dismissed, but not when the predecessors resign. This suggests that successor auditors are less likely to get involved in internal control opinion shopping due the high risk implied by the resignation of predecessor auditors.

Author

• Wu-Po Liu, Florida International University