Inner Mechanism And Governance For Auditor Opinion Shopping

Independent audit aims to improve reliability or credibility of the accounting information. Jensen and Meckling(1976)conclude that independent audit can reduce agency cost. Hence,the management volunteer to supply creditors and stockholders their financial statements and employ an auditor to make an attestation to prove they are true and fair.Empirical research shows that audited financial statements really possess certain information content.Namely, auditor opinion can bring some economic consequences.However,if a company threatens an auditor by dismissal or takes the way of temptation of increasing audit fees to get his support for its published financial statements,there will be very adverse economic consequences.Such behavior between companies and auditors is called auditor opinion shopping.According to SEC(1988),Auditor Opinion Shopping refers to"the search for an auditor willing to support a proposed accounting treatment designed to help a company achieve its reporting objectives, even though that treatment might frustrate reliable reporting".Obviously,auditor opinion shopping will impair auditor independence,lower audit quality and leads to audit failure.That is,it will mislead the investors and weaken the effect of resources allocation for the capital market.Meanwhile, auditor opinion shopping deviates from the basic concept of accountability completely and greatly reduces audit control and impedes the expansion of audit functions. To some extent, auditor opinion shopping can not meet the public expectation and weaken audit functions and has an adverse impact on audit roles in capital market.So it is essential to make the research on the inner mechanism of auditor opinion shopping to disclose the characteristics and laws,helping to avoid the occurrence of such acts and to fulfill the functions and roles better for audit in the maintenance of the capital market.Scholars at home and abroad have made wide and sufficient research on auditor opinion shopping and accumulated many literatures.For the market in China,the study is neither deep nor systematic and empirical evidences are partial. The main shortage is as follows:Firstly,the study does not combine the characteristics of audit market demand well. For example, China's audit market is driven entirely by the Government, mandatory demand being dominant and voluntary demand being short. In this sense, price competition is the main manner. However, the existing studies do not verify this hypothesis well.Secondly,the study does not embody the characteristics of Chinese traditional culture. For example,to cope with affairs well should depend on guanxi and human feelings,which is Chinese cultural traditon and characteristics.It must be universal to realize auditor opinion shopping through such abnormal guanxi.Thirdly,the study does not concern public expectation. In recent years, Enron, WorldCom and other corporate scandals have caused tremendous changes in the audit environment, the audit standard-setting organizations are more focusing on how to improve the professional standard of auditors, in order to better meet the expectations of the public. A large number of inappropriate related party transactions are peculating the interests of listed companies exist in China stock market,which becoming hot spots of public concern. The public expect auditors to detect inappropriate related party transactions and to restrain them. Therefore, whether auditors are concerning about the inappropriate related party transactions involves the public's confidence in the audit report, relating to the audit professional reputation and development.Finally,the in-depth of the study is not enough.Such as the inappropriate related party transactions, mergers and acquisitions or restructuring have not been considered in the study of impact factors of auditor changes and auditor fees.The study does not have a comprehensive observation of the relativity between auditor changes, auditor fees and earnings management,in order to judge whether auditor opinion shopping has taken place in essence.In combination with the special system background,the dissertation attempts to make further verification or modification for some existing conclusions and makes an effort to pioneer the research on a new level through improving research design and research methods(mainly research design).In full possession of the literature at home and abroad,the dissertation reviewes the course of development of independent audit systematically and analyses the basic system arrangements for the audit market in China.The dissertation deeply analyse the behavior of auditor opinion shopping from some aspects such as the principal-agent relationship variation, incomplete contract, signal transmission malfunction and regulation failure.Then,surrounding the two paths of auditor changes and audit fees,the dissertation collects the evidences for auditor opinion shopping and disclose its inner mechanism through empirical analysis mainly.Finally,combining empirical evidences,the dissertation puts forward comprehensive governance for auditor opinion shopping.The dissertation is composed of 7 chapters.Main contents of each chapter are as follows:Chapter 1 is introduction.The chapter has the following 5 parts.First is about research background and research significance;Second concerns research thought and issues to resolve;Third is research methods and technology path;Fourth is research framework and writing arrangements for the various chapters;Fifth defines auditor opinion shopping and plans simple research chart.The chapter is overall planning.Chapter 2 is literature review.The chapter summarizes the relevant literature home and abroad. Specifically,the literature concerns four parts involving independent audit demand and audit function alienation,auditor changes,audit fees and regulation for auditor opinion shopping.Then the chapter makes comments on the literature.Finally,the chapter sums up the shortage of the study concerning auditor opinion shopping.The chapter identifies the research opportunities through literature review, being prerequisite for the research.Chapter 3 is system background and theoretical analysis.The dissertation reviewes the course of development of independent audit systematically.Then, the dissertation analyses the basic four system arrangements for the audit market in China.Finally, the dissertation deeply analyses the behavior of auditor opinion shopping by application of the thoery of principal-agent,contract,signal transmission and regulation. Analysis of system background ensures the rationality and logicality of the research hypothesis of the behind.Analysis of behavior of auditor opinion shopping is the tools to explain the empirical research results.So,the chapter is the research base. Chapter 4 is auditor changes and auditor opinion shopping.It can drop an important hint to find some evidences for auditor opinion shopping from the perspective of auditor changes.The chapter mainly discusses the relationship between auditor changes and auditor opinion shopping,put forward 5 hypotheses,and build successively the impact factors model for auditor changes and the regression model for accounting quality and the regression model for inappropriate related party transactions.The research finds the main causes for auditor changes,the relationship between earnings management and auditor opinion,characteristics and ways of earnings management, and basic characteristics and manner of inappropriate related party transactions.Empirical evidences show that auditor changes improve accounting quality and audit quality,so there does not exist auditor opinion shopping for auditor changes.Chapter 5 is audit fees and auditor opinion shopping.Based on the empirical research of the last chapter and using the same data,this chaper explores the inner mechanism and characteristics for auditor opinion shopping from the perspective of audit fees, put forward 6 hypotheses successively,and makes comprehensive and deep research on auditor opinion shopping through descriptive statistics and model regression analysis. Descriptive statistics show the basic characteristics of audit fees under the different classification criteria and mean value, standard deviation and the extreme value for main variables,and also inspect the correlation coefficient between the main variables. Regression analysis have built 5 models such as the impact factors model for audit fees, the impact factors model for abnormal audit fees, the determinants model of auditor opinion, the regression model for accounting quality and the regression model for inappropriate related party transactions,testing the above 6 hypotheses in all directions.As a whole,empirical research proves that auditor opinion shopping does exist between the listed companies and the incumbent auditors.Chapter 6 is governance for auditor opinion shopping.Based on the earlier chapters,especially in accordance with empirical research results,this chapter supplies the response governance measures for auditor opinion shopping from the demand side,the supply side and the regulatory side. Overall governance plan is that we should prevent the behavior of auditor opinion shopping in terms of the sources. On the one hand, we need eliminate the motive for auditor opinion shopping; On the other hand,we should build a fair,just and effective audit market in order that the market mechanism can really play the role.Therefore,both the supply side and the demand side should not have the ability of hold-up and the ability to threaten the other party. At the same time, it is necessary to improve laws and regulations, playing a synergistic effect between government regulation and profession regulation.Chapter 7 is conclusion,contribution and follow-up study.This chapter is summary,summing up the conclusion of the dissertation,extracting the main contribution,introducing the main limitation,and also indicating the direction of follow-up study.Main contribution of this dissertation reflects in three parts,which are as follows:Firstly,the dissertation has made deep and systematical research on inner mechanism of auditor opinion shopping.The research supports the characteristics of the securities market in China that mandatory demand is dominant and voluntary demand is short.In this market,the listed companies pay more attention to audit fees,and do not care about audit quality.What's more,Non-Big Four audit firms have better audit quality than Big Four audit firms. At the same time, large companies possessing more assets have strong pricing power of the audit fees,namely realising the motive to shop auditor opinion through increasing no audit fees. With the strengthening of market supervision,audit quality is obviously improved.Secondly,based on the existing research results, the dissertation has some contribution in research methods and has gained furthur evidence.About research resign.On the one hand,the research introduces the variables of merger or reorganization, related party transactions which substitute for audit complexity or audit risk. Simultaneously,the dissertation makes a survey of the relationship between the variables of inappropriate related party transactions and auditor changes,audit fees and auditor opinion,thus making further verification on auditor opinion shopping and also disclosing audit expectation gap and so on;On the other hand,the research measures the performance of companies with roa and ROA respectively, the former denoting the real performance, the latter representing the performance with manipulation. Research proves that the listed companies do enforce universal earnings management,moreover,through below-the-line items.About research findings. The research supplies the evidences for auditor opinion shopping.Research shows the companies seek for the other strategy to shop auditor opinion and successfully buy the incumbent auditors through increasing audit fees because of strict supervision over auditor changes.The supervised tries to bypass the regulatory obstacles and aviod regulation,which is rather serious in China. This dissertation also reveals the universality of earnings management and occurrence law,and ways of inappropriate related party transactions,which points out the direction for the regulation.Finally, the dissertation supplies some measures for governance for auditor opinion shopping.On the one hand, we need eliminate the motive for auditor opinion shopping; On the other hand,we should build a fair,just and effective audit market in order that the market mechanism can really play the role.Therefore,both the supply side and the demand side should not have the ability of hold-up and the ability to threaten the other party. At the same time, it is necessary to improve laws and regulations, playing a synergistic effect between government regulation and profession regulation.