The Relationship between Supervisory Independence and Auditor’s Opinion Shopping: Market Competition influence

Document Type : Original Article

Authors

• Mahmoud Mousavi Shiri ¹
• Atiye Eramiyan ²

¹ Department of Management, Economics and Accounting, Payamenoor University, Tehran, Iran

² Department of Accounting, Imam Reza University, Mashhad, Iran

10.22067/ijaaf.2022.41717

Abstract

It is stated in the financial reporting literature that companies in a competitive industry will pursue better disclosure policies. On the other hand, Product market competition substitutes internal governance that reduces agency costs. This study investigates the effect of product market competition on the relationship between the supervisory independence of the firm and the auditor’s opinion on shopping. In this study, four methods have been considered to determine the occurrence of opinion shopping. It is assumed that opinion shopping occurs when one of these four conditions is met. The study sample includes 162 listed companies on the Tehran Stock Exchange during 2014–2019. Research hypotheses were tested by using logistic regression analyses. The results show that if the auditor's opinion shopping criterion is the ratio of the amount of restatement of financial statements to income, the board's independence has a negative and significant relationship with the auditor’s opinion shopping. The research findings also show that the audit committee's independence was not related to the auditor’s opinion shopping criteria. Also, separate tests on the role of product market competition on the above relationships indicate that this variable does not have moderator effects.

Keywords

• Audit Fee
• Auditor’s Opinion Shopping
• Independence of the Board of Directors
• Independence of the Audit Committee
• Product Market Competition

Main Subjects

• Auditing

---

©2022 The author(s). This is an open access article distributed under Creative Commons Attribution 4.0 International License (CC BY 4.0).

References

1. Abbott, L.J., S.Parker, and Peters, G.F. (2004). Audit committee characteristics and restatements Auditing.A Journal of Practice & Theory, 23(1),pp. 69-87.https://doi.org/10.2308/aud.2004.23.1.69
2. Agrawal, A. and Chadha S. (2005). Corporate governance and accounting scandals.Law and Economics Journal, 48(2),pp. 371-406. http://dx.doi.org/10.1086/430808
3. Alkilani, S., Hussin, W. and Salim,B. (2019). The Influence of Audit Committee Characteristics on Modified Audit Opinion in Jordan. Journal of Finance and Accounting, 7(3), pp. 95-106.http://doi.org/10.11648/j.jfa.20190703.14
4. Almutairi, A.R. and Kimberly, AD. Terrance, S. (2009). Auditor tenure, auditor specialization, and information asymmetry. Managerial Auditing Journal,24(7),pp. 600-623. http://dx.doi.org/10.1108/02686900910975341
5. Alzoubi, E.S.S. (2019). Audit committee, internal audit function and earnings management: evidence from Jordan. Meditari Accountancy Research, 27(1), pp. 72-90. https://doi.org/10.1108/MEDAR-06-2017-0160
6. Baggs, J. and DeBettignies, J. E. (2007). Product market competition and agency costs. TheJournal of Industrial Economics, 55(2), pp. 289-323. https://doi.org/10.1111/j.1467-6451.2007.00312.x
7. Baysinger, B.D. andButler, H.N. (1985). Corporate governance and the board of directors: performance effects of changes in board composition.The Journal of Law, Economics, and Organization, 1(1), pp. 101-124. https://www.jstor.org/stable/764908
8. Beasley, M.S. (1996). An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud. The Accounting Review, 7(4), pp. 443–465. https://www.jstor.org/stable/248566
9. Beasley, M.S., Carcello, J.V., Hermanson, D.R. and Lapides, P.D.(2000). Fraudulent financial reporting: Consideration of industry traits and corporate governance mechanisms. Accounting Horizons, 14(4), pp. 441-54. https://doi.org/10.2308/acch.2000.14.4.441
10. Bernardus,L.D.S., Fitriany,F. (2017). Impact of Abnormal Audit Fee on Audit Opinion.Advances in Economics, Business and Management Research, The 6th International Accounting Conference (IAC 2017), Yogyakarta, Indonesia. pp.254-259.https://doi.org/10.2991/iac-17.2018.45
11. Blue Ribbon Committee (BRC). (1999). Audit committee characteristics and restatements: A study of the efficacy of certain blue ribbon committee recommendations. New York: New York Stock Exchange and National Association of Securities Dealers.
12. Braunbeck, G. (2010). The potential determinants of audit quality in Brazil. Doctoral thesis, University Sao Paulo, Sao Paulo, Brazil.
13. Brown, H. and Wright, A.(2008). Negotiation research in auditing. Accounting Horizons, 22(1), pp. 91-109.https://doi.org/10.2308/acch.2008.22.1.91
14. Carcello, J., Hermanson, D. andYe, Z. (2011). Corporate governance research in accounting and auditing: Insights, practice implications, and future research directions. Auditing, A Journal of Practice & Theory, 30(3), pp. 1-31.https://doi.org/10.2308/ajpt-10112
15. Carcello, J.V, Hermanson, D., Neal, T.L. and Riley, R. (2002). Board characteristics and audit fees. Contemporary Accounting Research, 19(3), pp. 365-385. https://doi.org/10.1506/CHWK-GMQ0-MLKE-K03V
16. Carcello, J.V, Neal, T.L. (2000). Audit committee composition and auditor reporting.The Accounting Review, 75(4), pp. 453-467.https://doi.org/10.2308/accr.2000.75.4.453
17. Carson, E. (2009). Industry specialization by global audit firm networks. The Accounting Review, 84(2), pp. 331–354.https://doi.org/10.2308/accr.2009.84.2.355
18. Chambers, D. and Payne J. (2008). Audit Quality and Accrual Reliability, Evidence from the Pre-and Post-Sarbanes-Oxley Periods.Managerial Auditing Journal, 26(5), pp. 437-456. https://doi.org/10.1108/02686901111129580
19. Chan, A. M., Liu, Y. G. and Sun, J. (2013). Independent audit committee members’ board tenure and audit fees.Accounting and Finance, 53(4), pp. 1129-1147. https://doi.org/10.1111/j.1467-629X.2012.00490.x
20. Cheng, P., Man, P. and Yi, C. H. (2013). The impact of product market competition on earnings quality.Accounting and Finance, 53(1), pp. 137-162. https://doi.org/10.1111/j.1467-629X.2011.00457.x
21. Chhaochharia, V., Grullon, G., Grinstein, Y. andMichaely, R.(2012). Product market competition and agency conflicts: Evidence from the Sarbanes Oxley law.Working paper, http://ssrn.com/ abstract = 1109225
22. Choi, J. H., Kim, C, Kim, J.B. andZang, Y. (2010). Audit office size, audit quality, and audit pricing.Auditing, A Journal of Practice & Theory, 29(1), pp. 73–97.https://doi.org/10.2308/aud.2010.29.1.73
23. Craswell, A., Francis, J.R. and Taylor, S.L. (1995). Auditor brand name reputations and industry specializations. Journal of Accounting and Economics, 20(3), pp. 297-322.https://doi.org/10.1016/0165-4101(95)00403-3
24. Darrough, M.N. and Stoughton, N.M. (1990). Financial disclosure policy in an entry game.Journal of Accounting and Economics, 12(1-3), pp. 219- 243. https://doi.org/10.1016/0165-4101(90)90048-9
25. DeAngelo, L. (1981),"Auditor size and auditor quality", Journal of Accounting & Economics, 3(3), pp. 183-199.https://doi.org/10.1016/0165-4101(81)90002-1
26. Dechow, P. M., Ge W. andSchrand, C. M. (2010). Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences. Journal of Accounting and Economics, 50(2-3), pp. 344–401.https://doi.org/10.1016/j.jacceco.2010.09.001
27. Demirkan, S,Fuerman, R.D. (2014). Auditor Litigation: Evidence that revenue restatements are determinative. Research in Accounting Regulation, 26(2), pp.164–174.https://doi.org/10.1016/j.racreg.2014.09.006
28. DeZoort, F.T., Hermanson, D. and Houston, R. (2008). Audit committee members support for proposed audit adjustments Pre SOX versus post SOX judgments. Auditing: A Journal of Practice & Theory, 25(1), pp. 85-104.https://doi.org/10.2308/aud.2008.27.1.85
29. Fargher, N. Taylor, M. H. and Simon, D.T. (2001). The demand for auditor reputation across international markets for audit services. International Journal of Accounting, 36(4), pp. 407-421. https://doi.org/10.1016/S0020-7063(01)00116-9
30. Files, R; Sharp, NY and Thomson, A.M. (2014). Empirical evidence on repeat restatements.Accounting Horizons, 28(1), pp. 93-123. https://doi.org/10.2308/acch-50615
31. Gal-Or, E. (1985). Information sharing in oligopoly. Econometrica, 53(2), pp. 329-343.https://doi.org/10.2307/1911239
32. Garcia Osma, B., Gill-de-Albornoz, B., de Las Heras, E., & Rusanescu, S. (2018). OpinionShopping: Firm versus Partner-Level Evidence. Available at SSRN: https://ssrn.com/abstract=2776609
33. Gertner, R., Gibbons, R. andScharfstein, D. S. (1988). Simultaneous signaling to the capital and product markets.Rand Journal of Economics,19(2), pp. 173-190.https://doi.org/10.2307/2555698
34. Giroud, X. and Mueller, H.M. (2011). Corporate governance, product market competition, and equity prices.The Journal of Finance, 66(2), pp. 563-600.https://doi.org/10.1111/j.1540-6261.2010.01642.x
35. Hang, S. (2018). The Relationship between Firm Market Power and Audit Fee Decisions. Journal of International Trade & Commerce(J. Int. Trade Commer.), 14(3), pp. 89-99. https://ssrn.com/abstract=3309545
36. Lai Kam-Wah. (2009). Audit Opinion and Disclosure of Audit Fees.Journal of Accounting& Finance, 24(1), pp. 91-114.https://doi.org/10.1177/0148558X0902400106
37. Lazer, R.J.,Livnat, C. and Tan, E. L. (2004). Restatements and accruals after auditor changes.Working paper, New York University.The USA.
38. Lennox ,C .(2002). Opinion Shopping and the Role of Audit Committees when Audit Firms are Dismissed, The US Experience. The Institute of Chartered Accountants of Scotland. Dismissed: The US Experience. The Institute of Chartered Accountants of Scotland
39. Li, D. (2010). Does auditor tenure affect accounting conservatism? Further evidence.Journal of Accounting and Public Policy, 29(3), pp. 226-241. https://doi.org/10.1016/j.jaccpubpol.2010.03.004
40. Lin, C. and Wei, L. (2014). Product market competition and firms’ voluntary disclosure behavior: Evidence from a quasi-natural experiment.Working Paper, The University of Hong Kong.China.
41. Neal, T.L. and Riley, R.R. (2004). Auditor industry specialist research design. Auditing: A Journal of Practice & Theory, 23(2), pp. 169-177.https://doi.org/10.2308/aud.2004.23.2.169
42. O'keefe, T.B., King, R. D. and Gaver, K.M. (1994). Audit fees, industry specialization, and compliance with GAAS reporting standards. Auditing. A Journal of Practice and Theory, 13(1), pp. 41-55.
43. Palmrose, Z-V. (1986). Audit fees and auditor size: further evidence.Journal of Accounting Research,24(1), pp. 97-110.https://doi.org/10.2307/2490806
44. Raith, M. (2003). Competition, risk and managerial incentives", The American Economic Review, , 93(4), pp. 1425-1436. https://doi.org/ 10.1257/000282803769206395
45. Ramdani, D. andWitteloostuijn, A.V. (2010). The Impact of Board Independence and CEO Duality on Firm Performance, A Quantile Regression Analysis for Indonesia, Malaysia, South Korea and Thailand. British Journal of Management, 21(3), pp. 607-627. https://doi.org/10.1111/j.1467-8551.2010.00708.x
46. Ruddock, C., Taylor, S.J. and Taylor, S.L. (2006). Non-audit services and earnings conservatism: Is auditor independence impaired?. Contemporary Accounting Research, 23(3), pp. 701-746.https://doi.org/10.1506/6AE8-75YW-8NVW-V8GK
47. Securities and Exchange Commission. (1988). Disclosure Amendments to Regulation S-K, Form 8-K and Schedule 14A Regarding Changes in Accountants and potential Opinion Shopping Situations, Financial Reporting Release 31, Washington, D.C.
48. Shan, Y., G., Troshani, I. and Tarca, A. (2019)," Managerial ownership, audit firm size, and audit fees, Australian evidence", Journal of International Accounting, Auditing and Taxation, 35(c), 18–36. https://doi.org/10.1016/j.intaccaudtax.2019.05.002
49. Simunic, D.A. (1987). Product Differentiation in Auditing: Auditor Choice in the market for Unseasoned New Issues. Vancouver, BC: The Canadian Certified General Accountant Research Foundation
50. Sultana, N., Singh, H., der Zahn, V. and Mitchell, J. L, (2015). Audit Committee Characteristics and Audit Report Lag.International Journal of Auditing, 19(2), pp. 72-87. https://doi.org/10.1111/ijau.12033
51. Teng, M. and Li, C. (2011). Product Market Competition, Board Structure and Disclosure Quality. Frontiers of Business Research in China, 5(2), pp. 291-316. https://doi.org/10.1007/s11782-011-0132-5
52. Tsui, J.S.L., B. Jaggi, andGul, F. A. (2001). CEO domination, growth opportunities, and their impact on audit fees. Journal of Accounting, Auditing and Finance, 16(3), pp. 189–208.https://doi.org/10.1177/0148558X0101600303
53. Wang, K., O, S., Iqbal, Z. (2009). Audit pricing and auditor industry specialization in an emerging market: evidence from China. Journal of International Accounting, Auditing and Taxation, 18(1), pp. 60-72. https://doi.org/10.1016/j.intaccaudtax.2008.12.006
54. Wang, Y, (2015). Product Market Competition and Audit Fees. Auditing: A Journal of Practice & Theory, 34(4), pp. 139-156. https://doi.org/10.2308/ajpt-51014