Korean evidence on auditor switching for opinion shopping and capital market perceptions of audit quality

Abstract

This study examines whether auditor switching for opinion shopping (OS) influences investors’ perceptions of audit quality (proxied by earnings response coefficients; ERCs). To the extent that audit quality deteriorates after firms switch auditors for OS, investors are less likely to rely on these firms’ audited earnings. This may result in a negative association between auditor switching for OS and ERCs. However, when the intention for auditor switching is undetected by investors, ERCs would do not differ depending on whether firms switch auditors for OS or not. We find that firms switching auditors for OS have lower ERCs than non-switching firms or those that switch for other reasons, suggesting that investors perceive auditor switching for OS as evidence of impaired auditor independence.