Do Independent Audit Committees Prevent Auditor Opinion Shopping?

Abstract

This study analyses the impact of audit committee independence on auditor dismissal decisions and the successor auditor choice. We pay special attention to those changes that take place after firms receive a qualified audit report. These changes may be considered the observable consequence of the unobservable threat of dismissal from a client who decides to improve the audit report, a threat that could impair auditor independence. We also analyze subsequent auditor choice looking at auditors’ economic dependence on the client as a proxy for the level of independence of the new auditor. Motivation for this study comes from an interest in audit committees’ effectiveness in reducing the scope of auditor opinion shopping. Results from a sample of 110 listed Spanish companies between 1998-2005 show that more independent audit committees reduce the likelihood of auditor change after the company has received a qualified audit report. In those firms that change the auditor subsequent to the reception of a qualified report, more independent audit committees prevent the appointment of a new auditor of lower independence. We also find a positive and significant relation between audit committee independence and auditor dismissals following clean opinions. In these cases, more independent audit committees promote the selection of an auditor with a lower level of economic dependence, in comparison with the predecessor. These findings may have political implications because existing regulations do not limit the presence of inside directors on audit committees. This study is also a valuable contribution to the existing literature on the topic.