The study results are important to regulators, practitioners, and academics. The findings show that internal controls opinion shopping appears to occur among firms that have clean internal control opinions prior to a restatement. In addition, clients have the incentive to manipulate the audit process, via internal control opinion shopping, due to the increased focus and oversight on internal controls reporting. Finally, auditor dismissals that occur late in the fiscal period are more likely to be associated with internal control opinion shopping.   

Newton, N. J., J. S. Persellin, D. Wang, and M. S. Wilkins. 2016. Internal Control Opinion Shopping and Audit Market Competition. The Accounting Review 91 (2): 603–623.

This study evaluates three research questions related to opinion shopping using the internal controls environment. There have been historical concerns with the presence of audit opinion shopping. However, most studies use going concern opinions in assessing audit clients’ retention and dismissal behavior. This study expands the opinion shopping environment to internal control reporting. Going concern opinions typically have a low base rate of occurrence and have leading indicators (poor growth, bankruptcy indicators, etc.). Internal control opinions do not have similar indicators that give rise to a warning of an adverse internal control opinion. From this background, the authors investigate: 1) whether internal control opinion shopping exist; 2) how audit market competition influences internal control opinion shopping; and 3) does the timing of an auditor dismissal indicate opinion shopping motivations.  

This study also provides an avenue to evaluate opinion shopping in the period after the passage of the Sarbanes-Oxley Act. In addition, it highlights the unintended consequences of increased audit market competition. Finally, it lends support to recent regulatory concern over the decrease in material weakness assessments that may not be the caused by improved internal control environments.

The authors employ an archival research methodology in this study. Audit opinion and audit client data is from Compustat, Audit Analytics, and the Center for Research in Security Prices (CRSP). The sample period starts in 2005, the year after the implementation of SOX Section 404, and ends in 2011.

• The authors find that audit clients are successful at internal control opinion shopping. The results show that clients would have received adverse internal control opinions at a higher rate if they made different auditor retention or dismissal choices.
• When assessing the type of audit firm changes, the results suggest that opinion shopping may be more prevalent for audit clients that do not need the services of a Big 4 auditor.
• Using three proxies for audit market concentration, the authors find a higher likelihood of opinion shopping in markets with high concentration.
• The authors also find that auditor dismissals that occur in the third fiscal quarter are more likely to be associated with opinion shopping compared to auditor dismissals occurring prior to the end of the second quarter, especially in competitive markets.
• The authors performed supplemental analyses to determine the association between internal control opinion shopping and going concern opinion shopping. They find that internal control opinions are less predictable and therefore more valuable than going concern opinions. They did find evidence of going concern opinion shopping in the pre-SOX period but not in the post-SOX period. This gives rise to the possibility that going concern reporting has a reduced role in auditor retention decisions after the introduction of SOX.

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