Korean evidence on auditor switching for opinion shopping and capital market perceptions of audit quality

Chung, Haejun; Kim, Yewon; Hee-Yeon, Sunwoo

doi:10.1080/16081625.2020.1845000

Cited by 9 publications

(9 citation statements)

References 35 publications

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“…Empirical evidence similarly documents that high-quality auditors are less likely to be associated with earnings management (Balsam et al , 2003; Gaver and Utke, 2019), incidence of financial report restatement (Chin and Chi, 2009; Francis et al , 2013), fraud (Lennox and Pittman, 2010) and useless accounting information (Habib and Bhuiyan, 2011; Sharma et al , 2017). Other evidence points to positive interaction among shareholders, investors, financial analysts and other stakeholders when they are associated with high-quality auditors; they place more confidence in information certified or accredited by such auditors (Knechel et al , 2007; Wu and Wilson, 2016; Tanyi and Roland, 2017; Chung et al , 2020). Thus, firms’ worldwide, particularly public firms, are required to appoint an objective and competent auditor to certify management assertions in relation to the reliability and accuracy of financial statements and control systems.…”

Section: Institutional Information Prior Research and Hypothesis Deve...mentioning

confidence: 99%

Does the expertise of outsourced IAF providers affect audit efficiency? Empirical evidence from an emerging market

Baatwah

Omer

Aljaaidi

2021

PAR

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Purpose This study aims to examine the effect on audit efficiency of outsourced internal audit function (IAF) providers with industry and/or firm-specific expertise. Drawing on relevant studies from external and internal audit literature, the authors assume that such IAF providers are associated with greater audit efficiency as proxied by audit report lag and audit fees. Design/methodology/approach Based on a sample of firms listed on the Omani capital market during 2005–2019, the pooled regressions are used to test the developed hypotheses. The authors use the market share approach to identify outsourced IAF industry expertise providers and tenure to measure the firm-specific expertise of outsourced IAF providers. Findings The authors find that industry outsourced IAF providers are not associated with shorter audit report lag and lower audit fees. The authors also find that firm-specific expertise outsourced IAF providers are associated with a greater reduction in audit report lag and audit fees. These conclusions are robust under a battery of analyses. The significant contribution of firm-specific expertise outsourced IAF providers to audit efficiency is incremental when abnormal audit report lag and audit fees analysis is conducted. Originality/value The results are the first to attest to the contribution of outsourced IAF with firm-specific expertise. They also show that industry expertise held by outsourced IAF providers does not contribute to audit efficiency.

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Section: Institutional Information Prior Research and Hypothesis Deve...mentioning

confidence: 99%

Does the expertise of outsourced IAF providers affect audit efficiency? Empirical evidence from an emerging market

Baatwah

Omer

Aljaaidi

2021

PAR

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“…We use the methodology proposed by Lennox (2000) to identify OS behavior, which is widely applied in recent OS studies (Chen et al , 2016; Newton et al , 2016; Chung et al , 2019; Chung et al , 2021a). Here, OS is defined as when managers intentionally change (retain) their incumbent auditors in anticipation of a lower (higher) probability of receiving a modified audit opinion from the successor auditors.…”

Section: Methodsmentioning

confidence: 99%

“…Firms that change auditors for OS purposes exhibit a higher ex post type II error rate in their audit opinions, are more likely to misstate financial statements and issue restatements later than those that do not engage in OS and exhibit higher discretionary accruals (Chen et al , 2016; Chung et al , 2019). In addition, firms switching auditors for OS have lower earnings response coefficients than non-switching firms or those that switch for other reasons, suggesting that investors perceive auditor switching for OS as evidence of less independent auditors (Chung et al , 2021a). These negative consequences suggest that it is important to identify what induces or deters OS behavior.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

“…OS has long attracted the attention of regulators because of the possible deterioration in auditor independence (Krishnan and Stephens, 1995; Teoh, 1992). Prior studies evidence the negative consequences of OS such as decreased audit quality, negative market reaction and difficulty in raising new capital (Menon and Williams, 2010; Chen et al , 2016; Chung et al , 2019; Chung et al , 2021a). In response to the adverse effect of OS, researchers have tried to identify what induces or prevents OS behavior, such as regulatory enforcement (Choi et al , 2016), audit market competition (Newton et al , 2016) and client importance (Chen et al , 2016).…”

Section: Introductionmentioning

confidence: 99%

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The effect of the rules- versus principles-based accounting standards on opinion shopping

Chung

Kim²

2022

MAJ

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Purpose The purpose of this study is to examine whether the change in accounting standards from the rules-based local GAAP to the principles-based IFRS influences a manager’s opportunistic auditor choice for a favorable audit opinion, opinion shopping (OS) behavior. The authors view that IFRS adopters exploit the flexibility of IFRS to their advantage and search for auditors that are more likely to give clean opinions. However, auditors may refuse to yield to client pressure for OS, because of the greater potential audit risk under principles-based standards. Design/methodology/approach This study applies a difference-in-differences methodology by using Korean listed firms (i.e. IFRS adopters) as a treatment sample and Korean unlisted firms that do not voluntarily adopt IFRS (i.e. K-GAAP users) as the control sample. OS behavior is measured by the methodology of Lennox (2000). Findings The results of this study show that the OS behavior of IFRS adopters increases after IFRS adoption compared to that of K-GAAP users. This phenomenon is more prevalent when they are audited by non-Big 4 auditors or when they are economically important to auditors. These suggest that the principles-based IFRS without specific rules increase the scope of OS, and auditors tend to accept OS clients by weighing up its costs and benefits. Originality/value This study contributes to the literature on OS by presenting that the approach of accounting standards can be an important influencing factor on a firm’s successful engagement in OS. This finding also provides policy implications for many economies by suggesting mechanisms that can be developed to reduce clients’ opportunistic auditor choices under principles-based accounting standards.

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“…H. Chung et al (2019) document success in opinion shopping by distressed US companies to avoid going-concern opinions. 5 Using data from South Korea, Chung et al (2021) present evidence that stock market investors discount the information content of earnings of companies with auditor switching for the purpose of opinion shopping. Osma et al (2021) find evidence of opinion shopping at the audit firm level in Spain.…”

Section: Background and Literature Reviewmentioning

confidence: 99%

Do companies try to conceal financial misstatements through auditor shopping?

Singer

Zhang

2021

Business Fin & Account

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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 the negative consequences of engaging in auditor shopping.

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Korean evidence on auditor switching for opinion shopping and capital market perceptions of audit quality

Cited by 9 publications

References 35 publications

Does the expertise of outsourced IAF providers affect audit efficiency? Empirical evidence from an emerging market

Does the expertise of outsourced IAF providers affect audit efficiency? Empirical evidence from an emerging market

The effect of the rules- versus principles-based accounting standards on opinion shopping

Do companies try to conceal financial misstatements through auditor shopping?

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