Auditor conservatism and opinion shopping: Influence of client switching expectations on audit opinion decisions

This study investigates internal and external opinion shopping by considering the influence on audit reporting decisions of clients' auditor switching expectations. Internal opinion shopping may occur when a company is able to exert pressure on the incumbent auditor to issue a more favorable audit reporting option. External opinion shopping may occur when a company that has actually changed auditors is able to exert pressure on the new auditor to issue a more favorable audit reporting option than the company would otherwise deserve.; To investigate these influences on the audit reporting decision, I develop two models: Model 1, the auditor-switching model, is estimated to predict the probability of switching auditors for reasons other than opinion shopping. It is estimated using only non-stressed companies, because only stressed companies have been associated with receiving going-concern opinions. The estimated of the probability of switching from Model 1 along with the actual auditor-switching decision is used to calculate a proxy for internal and for external opinion shopping pressure. To investigate the effect of the internal and external opinion shopping on the auditor's reporting decision in Model 2, the auditor-reporting model, I include two pressure variables along with other financial condition control variables related to the reporting decision. In addition, the auditor-reporting decision in Model 2 is represented as a choice between the three reporting options allowed under SAS No. 59: unmodified audit opinion, disclosures with no going-concern opinion modification, and going-concern-modified audit opinion.; Model 1 provided insufficient explanatory power to allow for inferences to be made in Model 2 regarding internal and external opinion shopping. Thus, the results from Model 1 indicate that future research is necessary to suggest a better way of characterizing non-stressed switching companies. However, this study is the first to document the use of the middle reporting option allowed under SAS No. 59. Ancillary analyses comparing companies receiving first-time SAS No. 59-type disclosures to those receiving first time going-concern audit reports suggest that SAS No. 59-type disclosure companies are larger, have a lower incidence of default, and are more likely to have been audited by KPMG Peat Marwick rather than a non-Big 6 auditing firm. In addition, when comparing the Big 6 accounting firms, I find preliminary evidence that Arthur Andersen, Coopers and Lybrand, and KPMG Peat Marwick are more likely that Ernst & Young to require SAS 59-type disclosure over a going-concern audit report.