Internal control opinion shopping: Does initial audit fee discounting matter?

Both regulators and researchers are concerned that the lowballing of initial year audit fees may impair auditor independence (U.S. Senate 1977, 2002; American Institute of Certified Public Accountants (AICPA), 1978; Securities and Exchange Commission [SEC], 2000; Huang et al. 2015). Using a full sample of 1373 U.S. firm-year observations for which the client's predecessor auditor reports an adverse SOX Section 404 internal control opinion, we find that in the following year a successor auditor who lowballs audit fees is more likely to issue a clean internal control opinion. The results hold when the predecessor auditors are dismissed, but not when the predecessors resign. We also find that firms are no more likely to succeed in opinion shopping when the proportion of audit committee financial experts is high. In addition, we find internal control opinion shopping occurs with initial fee discounting only in competitive audit markets and the period of a few years following the adoption of SOX (since 2007).