The impacts of aggressive accounting choices on auditor changes

Although the literature has established a correlation between companies’ receiving going-concern opinions and their decision to change auditors, empirical studies that show this correlation often overlook the role that managerial opportunism plays with respect to companies’ accounting choices. To address this gap, we build upon the framework of Lennox (J Account Econ 29(3):321–337, 2000) to investigate how aggressive accounting practices and audit opinions influence auditor-switching decisions. By analyzing a sample of U.S. companies from 2002 to 2018, we find that companies engaging in aggressive accounting are more likely to switch auditors when they receive favorable audit opinions. Furthermore, such companies tend to dismiss their incumbent auditors rather than have them resign, and they are more inclined to select smaller audit firms as their successors. This pattern of dismissal and downward switching suggests that management engages in risky and opportunistic behaviors to secure more lenient opinions. Additional tests reveal that companies with aggressive accounting practices often persist in their accounting practices after they change auditors, even though the market does not fully recognize the opportunistic motives behind such switches. Those results reveal that even companies receiving favorable opinions may engage in opinion shopping by replacing auditors to serve opportunistic accounting motives. Overall, our findings suggest that managers’ desire to manipulate earnings significantly influences their auditor-switching decisions, thus reinforcing concerns raised by the Securities and Exchange Commission (SEC) regarding problematic auditor-switching practices and their impact on auditor independence and audit quality.