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

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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.

Keywords: Going Concern Opinion, Audit Opinion Shopping, Big 4, Non-Big 4

Authors’ individual contribution: Conceptualization — V.D.; Methodology — V.D.; Formal analysis — V.D.; Investigation — R.D.; Date Curation — V.D.; Writing — Original Draft — R.D.; Writing — Review & Editing — L.A.K. and J.Y.D.; Visualization — J.Y.D.; Supervision — L.A.K.; Project Administration — L.A.K.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: M42, M48, G34

Received: 06.06.2023
Accepted: 24.01.2024
Published online: 26.01.2024

How to cite this paper: Desai, V., Kidwell, L. A., Davidyan, J. Y., & Desai, R. (2024). 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. Corporate Ownership & Control, 21(1), 21–31. https://doi.org/10.22495/cocv21i1art2