Do publicly traded companies engage in opinion shopping after receiving a going concern audit opinion? Evidence from U.S. firms in the post-SOX era

Abstract

Audit opinion shopping continues to be of significant interest to regulators and is also of interest to investors and the public. This study examines whether in the post-SOX (Sarbanes-Oxley Act) era, publicly traded companies in the U.S. engage in the act of shopping for audit opinions after receiving a going concern opinion (GCO). We further examine whether auditor firm size (Big 4 versus non-Big 4) affects such activities. Using data from Compustat and Audit Analytics we identify financially distressed publicly-held U.S. firms between 2004 and 2015. Adopting the framework developed by Lennox (2000), we examine the difference in the probabilities between auditor switching and no-switching scenarios. We find evidence that public companies in the U.S. who receive GCOs are successful in shopping for clean audit opinions in a subsequent period. We also find that audit opinion shopping activities are more common among public companies who switch to non-Big 4 auditors as opposed to those who switch to Big 4 auditors. Our paper fills the gap in the literature by examining whether, in the post-SOX era, publicly-held firms in the U.S. engage in the act of shopping for audit opinions, after receiving a GCO.