JOINT ACCOUNTING AND FINANCE SEMINAR
School of Economics and Finance
School of Business

 

Opinion Shopping, Audit Firm Dismissals, and Audit Committees

By

Clive S. LENNOX
Department of Accounting
Hong Kong University of Science and Technology

 

Abstract

This paper tests whether companies engage in opinion shopping and examines the role of audit committees when auditors are dismissed (1996-98). There are three main findings. First, companies strategically dismiss when incumbent auditors are more likely to issue unfavorable opinions compared to newly appointed auditors. Using the methodology of Lennox (2000), it is estimated opinion shopping motivates 17% of auditor dismissals. Opinion shopping dismissals are also found to occur significantly later in the reporting period compared to other types of dismissals, indicating that companies dismiss when they are relatively sure the incumbent auditor will give an unfavourable report and when information asymmetries are greatest for incoming auditors. Second, I use the level of, and change in, audit committee meeting activity during the auditor dismissal year to estimate the extent to which committees participate in dismissal decisions. I estimate 15% of audit committees do not participate in auditor dismissal decisions, but opinion shopping is not significantly associated with participation. Third, Accounting Series Release No. 247 requires companies disclose whether audit committees approve audit firm changes. Consistent with audit committees promoting high quality financial reporting, I find committees are more likely to disapprove of auditor dismissals that are motivated by opinion shopping than other types of dismissals. However I also find independent audit committee members are more likely to leave committees that disapprove of opinion shopping. This suggests either senior management dismiss audit committee members who oppose opinion shopping, or committee members resign because they do not wish to be associated with opinion shopping.

 

Correspondence Address:

Prof. Clive S. LENNOX
Department of Accounting
Hong Kong University of Science and Technology
Clear Water Bay
Kowloon
Hong Kong

Phone	:	(852) 2358-7571
Fax	:	(852) 2358-1693
Email	:	accl@ust.hk