The Relationship between Management Entrenchment and Audit Opinion Shopping

Document Type : Original Article

Author

Economics and Administrative Sciences, Gaenat Branch, Islamic Azad University, Gaenat, Iran

Abstract

The present study aims to assess the relationship between management entrenchment and audit opinion shopping in listed firms on the Tehran Stock Exchange. In other words, this paper attempts to figure out whether management entrenchment can contribute to audit opinion shopping or not. For this study, research hypotheses were tested using a sample of 768 observations on the Tehran Stock Exchange during 2012-2017 and by employing the Logistic Regression Pattern. The results show a significant relationship between management entrenchment and opinion shopping, which means entrenchment leads to increased opinion shopping. Management entrenchment is among managers' factors to increase authority, job security, interests, and corporate governance, contributing to the decline of management entrenchment. One of the mechanisms of corporate governance is the auditor’s opinion. There are few studies on the quality of corporate governance components in Iran, and this study can pave the way for further studies on the relationship of management entrenchment with other factors.

Keywords

References

  1. Alfasa, F. (2013). Analisis Faktor Faktor Yang Mempengaruhi Opini Audit Going Concern. Skripsitidakditerbitkan. UniversitasAirlangga, Surabaya
  2. Ali, A. and Zhang, W.N. (2015). CEO Tenure and Earnings Management. Journal of Accounting and Economics, 59(1), pp. 60-79. https://doi.org/1016/j.jacceco.2014.11.004
  3. Allen, F., Qian, J. and Qian, M. (2005). Law, finance, and economic growth in China. Journal of Financial Economics, 77(1),   57-116. https://doi.org/10.1016/j.jfineco.2004.06.010
  4. Archambeault, D. and Dezoort, F.T. (2001). Auditor opinion shopping and the audit committee: An analysis of suspicious auditor switches. International Journal of Auditing, 5(1), 33-52.  https://doi.org/10.1111/1099-1123.00324
  5. Bame-Aldred, CH., Brandon, D.W., William, F.M.J., Rittenberg, R. and Stefaniak, Ch.M. (2013). A Summary of Research on External Auditor Reliance on the Internal Audit Function. AUDITING: A Journal of Practice & Theory, 32(1), pp. 251-286. https://doi.org/10.2308/ajpt-50342
  6. Banko, J., Frye, M. B., Wang, W. and Whyte, A.M. (2013). Earnings management and annual general meetings: The role of managerial entrenchment. Financial Review, 48(2), pp. 259-282. https://doi.org/10.1111/fire.12003
  7. Bebchuk, L.A., Cohen, A. and Ferrell, A. (2009). What matters in corporate governance?. Review of Financial Studies, 22(2), pp. 783–827. https://doi.org/10.1093/rfs/hhn099
  8. Bergstresser, D. and Philippon, T. (2006). CEO incentives and earnings management. Journal of Financial Economics, 80(3), 511-529. https://doi.org/10.1016/j.jfineco.2004.10.011
  9. Blay, A.D. (2005). Independence threats, litigation risk, and the auditor’s decision process. Contemporary Accounting Research, 22(4), 759-789. https://doi.org/10.1506/5FQ9-ANEA-T8J0-U6GY
  10. Baratiyan, S. and Salehi, M. (2013). the Effect of Management Entrenchment on the Equity Capital in Iran. Pakistan Journal of Commerce and Social Sciences, 7(1), 19-26. https://www.econstor.eu/handle/10419/188070
  11. Chakraborty, A., Rzakhanov, Z. and Sheikh, Sh.A. (2014). Antitakeover Provisions, Managerial Entrenchment, and Firm Innovation. Journal of Economics and Business, Vol. 72(2), pp.30-43. https://doi.org/10.1016/j.jeconbus.2013.10.001
  12. Chen, C.W., Collins, D.W., Kravet, T. D. and Mergenthaler, R.D. (2016a). Financial Statement Comparability and the Efficiency of Acquisition Decisions. Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2169082
  13. Chen, F., Peng, S., Xue, S., Yang, Z. and Ye, F. (2016). Do audit clients successfully engage in opinion shopping? Partner‐level evidence. Journal of Accounting Research, 54(1), 79–112. https://doi.org/10.1111/1475-679X.12097
  14. Chen, G.Z. (2020). Related Party Transactions and Opinion Shopping. Journal of Applied Finance & Banking, 10(1), pp. 173-202. https://ideas.repec.org/a/spt/apfiba/v10y2020i1f10_1_9.html
  15. Chow, C. and Rice, S. (1982). Quality audit opinions and auditor switching. The Accounting Review, 57(2), pp. 326-335.
  16. Carey, P., Tanewski, G. and Simnett, R. (2000). Voluntary demand for internal and external auditing by family businesses. Auditing: A Journal of Practice and Theory, 19(s-1), pp. 37–http://dx.doi.org/2308/AUD.2000.19.S-1.37
  17. Dechow, P. and Sloan, R. (1991). Executive Incentives and Horizon Problem: An Empirical Investigation. Journal of Accounting and Economics, 14(1), pp. 51-89. https://doi.org/10.1016/0167-7187(91)90058-S
  18. Dechow, P., Hutton, A. and Sloan, R. (1996). Economic consequences of accounting for stock-based compensation. Journal of Accounting Research, 34(3),  1–20. https://doi.org/10.2307/2491422
  19. DeFond, M.L., Wong, T.J. and Li, S. (1999). The impact of improved Auditor independence on Audit market concentration in China. Journal of Accounting and Economics, 28(3), pp. 269-305. https://doi.org/10.1016/S0165-4101(00)00005-7
  20. Deborah, A. and DeZoort, F.T. (2001). Auditor Opinion Shopping and the Audit Committee: An Analysis of Suspicious Auditor Switches. International Journal of Auditing, 5(1), 33-52. https://doi.org/10.1111/1099-1123.00324
  21. Fitzgerald, B.C., Omer, T.C. and Thompson, A.M. (2018). Audit Partner Tenure and Internal Control Reporting Quality: U.S. Evidence from the Not‐For‐Profit Sector. Contemporary Accounting Research, 35(1), pp. 334-364. https://doi.org/10.1111/1911-3846.12348
  22. Gompers, P., Ishii, J. and Metrick, A.(2003). Corporate governance and equity prices. Quarterly Journal of Economics, 118(1),  pp. 107-155. http://dx.doi.org/10.2139/ssrn.278920
  23. Haskins, M.E. and Williams, D.D. (1990). A contingent model of intra-big eight auditor changes. Auditing: A Journal of Practice & Theory, 9(3), 55-74
  24. Healy, P.M. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics, 7(1-3), 85–107. https://doi.org/10.1016/0165-4101(85)90029-1
  25. Holthausen, R.W., Larcker, D.F and Sloan, R.G. (1995). Annual bonus schemes and the manipulation of earnings. Journal of Accounting and Economics, 19(1), 29-74. https://doi.org/10.1016/0165-4101(94)00376-G
  26. Jensen, M.C. and Meckling, W.H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), pp. 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
  27. Krishnan, G. and Wang, C. (2015). The relation between managerial ability and audit fees and going concern opinions. Auditing: A Journal of Practice & Theory, 34(3), pp. 139-160. Doi: https://doi.org/10.2308/ajpt-50985
  28. Kouaiba, A. and Jarbouib, A. (2014). External audit quality and ownership structure: interaction and impact on earnings management of industrial and commercial Tunisian sectors. Finance and Administrative Science, 19(37), pp. 78–89. https://doi.org/10.1016/j.jefas.2014.10.001
  29. Lin, K., Tan, J., Zhao, L. and Karim, K. (2015). In the name of charity: Political connections and strategic corporate social responsibility in a transition economy. Journal of Corporate Finance, 32(3), pp. 327-346. https://doi.org/10.1016/j.jcorpfin.2014.10.007.
  30. Lennox, C. (2000). Do companies successfully engage in opinion shopping: Evidence from the UK. Journal of Accounting and Economics, 29(3), pp. 321-337. https://doi.org/10.1016/S0165-4101(00)00025-2
  31. Mustapha, M. and Che Ahmad, A. (2011). Agency theory and managerial ownership: evidence from Malaysia. Managerial Auditing Journal, 26(5), 419-436. https://doi.org/10.1108/02686901111129571
  32. Mayangsari, S. (2007). The auditor tenure and the quality of earnings: Is mandatory auditor rotation useful?. Unhas Makassar, 26(28), 1-25. http://digilib.mercubuana.ac.id/manager/t!@file_artikel_abstrak/Isi_Abstraksi_131861172097.pdf
  33. Naslmosavi, S.H. and Jahanzeb, A. (2016). The mediating role of human capital on the relationship between audit firm size and independent auditor's opinion: evidence from Iranian audit firms.International Journal of Accounting and Economics Studies, 4(2), pp. 102-108. https://www.sciencepubco.com/index.php/IJAES/article/view/6287
  34. Newton, N.J., Persellin, J.S., Wang, D. and Wilkins, M.S. (2016). Internal Control Opinion Shopping and Audit Market Competition. The Accounting Review, 91(2), pp. 603–623. https://doi.org/ 10.2308/accr-51149
  35. Osma, B.G., de AlbornozNoguer, B.G. and De las Heras Cristobal, E. (2017). Opinion shopping: Firm versus Partner-level evidence, Universidad Carlos III de Madrid.
  36. Olagunju, A. and Leyira, M. C. (2012). Audit Expectation Gap: Perspectives of Auditors and Audited Account Users. International Journal of Development and Management Review, 7(1), 197-215.   https://doi.org/10.4314/IJDMR.V7I1
  37. Praptitorini, M.D. and Januarti, I. (2011). AnalisisPengaruhKualitas Audit, Debt Default dan Opinion Shopping TerhadapPenerimaanOpini Going Concern. Journal AkuntansidanKeuangan Indonesia. 8(1), pp. 78-93. http://jaki.ui.ac.id/index.php/home/article/view/157
  38. Pugh, W.N., Page, D.E. and Jahera, J.S. (1992). The Effect of Antitakeover Charter Provisions on Corporate Decision-making, Journal of Financial Research, 15(1), 57–67. https://doi.org/10.1111/j.1475-6803.1992.tb00786.x
  39. Salehi, M., Mahmoudabady, M. and Adibian, M.S. (2018). The Relationship between Managerial Entrenchment, Earnings Management, and Firm Innovation. International Journal of Productivity and Performance Management, 67(9), pp. 2089-2107. https://doi.org/10.1108/IJPPM-03-2018-0097
  40. Simamora, R.A. and Hendarjatno, H. (2019). The effects of audit client tenure, audit lag, opinion shopping, liquidity ratio, and leverage to the going concern audit opinion. Asian Journal of Accounting Research, 4(1), pp. 145-156. https://doi.org/10.1108/AJAR-05-2019-0038
  41. Stein, J.C. (1988). Takeover threats and managerial myopia. Journal of Political Economy, 96(1), pp. 61–81. https://www.journals.uchicago.edu/doi/abs/10.1086/261524
  42. Schwartz, K.B. and Menon, K. (1985). Auditor switches by failing firms. The Accounting Review, 60(20),  248-261.
  43. Smith, D. (1986). Auditor ‘Subject to’ Opinions, Disclaimers, and Auditor Changes. Auditing: A Journal of Practice and Theory, 6, pp. 95-108.
  44. Tsui, J. and Gul A.F. (1998). A test of the free cash flow and debt monitoring hypotheses: Evidence from audit pricing. Journal of Accounting and Economics, 24(2), pp. 219-237. https://doi.org/10.1016/S0165-4101(98)00006-8
  45. Tsui, J. Jaggi, B. and Gul, F. (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
  46. Wallace, W. (1984). A time series analysis of the effect of internal audit activities on external audit fees. Altamonte Springs, FL: HA.
  47. Wang, Q., Wong, T.J. and Xia, L. (2008). State ownership, the institutional environment, and auditor choice: Evidence from China. Journal of Accounting and Economics, 46(1), pp. 112-134. https://doi.org/10.1016/j.jacceco.2008.04.001
  48. Yang, Z. (2013). Do political connections add value to audit firms? Evidence from IPO audits in China. Contemporary Accounting Research, 30(3),   891-921. https://doi.org/10.1111/j.1911-3846.2012.01177.x
  49. Yaghoobnezhad, A., Royaee, R. and Gerayli, M. S. (2014). The effect of audit quality on information asymmetry: empirical evidence from Iran. Asian Journal of Research in Banking and Finance, 4(1), pp. 128-139. https://www.indianjournals.com/ijor.aspx?target=ijor:ajrbf&volume=4&issue=1&article=011
  50. Zhao, Y. and Chen, K. (2008). Staggered boards and earnings management. Accounting Review, 83(5), 1347–1381. https://www.jstor.org/stable/30243548
  51. Zhuang, Z. (2018). The Importance of Partner Narcissism to Audit Quality. Accounting & Law Seminar, School of Accountancy, CUHK Business School, The Chinese University of Hong Kong, Sha Tin, Hong Kong. available at:www.fbe.hku.hk/events/seminar/-the-importance-of-partner-narcissism-to-audit-quality-by-dr-zili-zhuang

 

Send comment about this article
CAPTCHA Image

Files

Share

How to cite

Statistics