Do Companies Engage in Auditor Shopping to Conceal Misreporting? Evidence from Financial Misstatements
https://doi.org/10.1111/jbfa.12562
61 Pages Posted: 18 Oct 2018 Last revised: 27 Oct 2021
Date Written: July 11, 2021
Abstract
Prior studies on auditor shopping primarily focused on the motivation to
avoid unfavorable audit opinions, such as going concern and modified
opinion. In this study, we show that companies that misstate their
financial statements engage in auditor shopping to try to conceal the
financial misstatements. In other words, their misstatements would have
been discovered sooner had they made an opposite “replace or retain”
auditor decision. We further show that engagement in auditor shopping
results in a higher turnover of the CEO, the CFO, and audit committee
members, but only when auditor shopping involves auditor dismissal.
Thus, we document negative consequences of engaging in auditor
shopping. Finally, we show that effective monitoring curbs auditor
shopping. Our findings should be of interest to regulators who continue
to express concerns over this practice as well as to senior managers and
audit committee members.
Keywords: : auditor shopping; accounting misstatement discovery; executive turnover; audit committee turnover
JEL Classification: G38, M41, M42, M48
Suggested Citation: Suggested Citation