The practice of opinion shopping may adversely affect the perception of audit constituencies about the independent audit function, and thus the credibility of the accounting profession. Opinion shopping may also result in financial and reputation losses for the practicing accountant. By soliciting or accepting clients that constantly look for a more subservient auditor, the practicing accountant runs the risk of expensive lawsuits (and loss of reputation) and may be unable to recover the initial transaction and start-up costs. In a recent survey [Heiman-Hoffman et al. 1996], 130 practicing auditors viewed as particularly risky clients that engaged in opinion shopping.
Knowledge of the contextual factors (situations) perceived to imply opinion shopping, therefore, can help the practicing accountant avoid potential financial and reputation losses. This knowledge can also help policy makers (the accounting profession and the SEC) reduce opinion shopping and bolster the credibility of the accounting profession. In particular, the accounting profession and the SEC can modify the disclosure rules on auditor-client relationships to emphasize or include situations that portend opinion shopping.
The practice of opinion shopping and the accounting profession's attempt to reduce its undesirable effects are not unique to the United States. Canada, New Zealand and other countries have faced the same issues. Waller (1991), Johnston (1992), and Cherry (1996) discuss opinion shopping practice and the accounting profession's response in Canada and New Zealand. Interestingly, the mechanisms installed in Canada and New Zealand to reduce the undesirable effects of opinion shopping are very similar to those in the U.S. This study, therefore, potentially influences policy making in other countries.
We examine perceptions, obtained via a questionnaire, of certified public accountants (CPAs), chief financial officers (CFOs), and financial analysts (FAs) to identify situations that imply opinion shopping. The three subject groups represent auditors and their constituencies, namely, preparers and users of financial reports.
Our results indicate that auditor change preceded by a qualified opinion, disclaimer of opinion, or going-concern modification, as well as operating or financial difficulty whether or not accompanied by change of auditor, portends possible opinion shopping. The practicing accountant should, therefore, take extra precautions in accepting clients that have received other than a standard unqualified opinion from their predecessor auditors or that are experiencing financial difficulties. The results also imply that two modifications of the existing disclosure requirements may bolster the credibility of the accounting profession. One is to require additional disclosure, beyond what is currently required by the SEC and the American Institute of Certified Public Accountants (AICPA), when an auditor is replaced after issuing a qualified opinion, disclaimer of opinion, or going-concern modification. The other is to expand the disclosure requirements to include situations where a company is facing deteriorating financial condition.
CONTEXTUAL FACTORS IMPLYING OPINION SHOPPING
The academic and professional literature on auditor-client relationships and auditor independence suggests that certain situations may create a motive for, or increase the motivation of, managers to shop for opinions. These situations are discussed below, and are incorporated into the questionnaire. The questions are listed in Table 1.
Managers have motives to shop for opinions and show rosier financial reports when they own shares of their companies (through open market purchase or stock option plans) since those reports may affect the value of their holding. It can be argued that the higher a manager's ownership in the company, the higher the probability that he/she will try to manipulate the financial reports to impress third parties. …