Defense Date

Fall 10-30-2017

Degree Type

Dissertation

Degree Name

Accounting

Department

Business Administration

Committee Chair/First Advisor

Marcus Caylor

Committee Member or Co-Chair

Divesh Sharma

Reader

Dennis Chambers

Abstract

Auditors issue going concern modified opinions when there is substantial doubt about the company’s ability to continue its operations into the foreseeable future. Companies frequently respond to this type of audit opinion by changing auditors. Critics, such as the SEC, suggest that this may be done in order to opinion shop (i.e., find an auditor who is likely to issue a more favorable unqualified opinion). However, prior research has indicated that opinion shopping may not be effective. Since firms receiving a going concern modified opinion are clearly under significant financial distress, the effect a change in auditor has on subsequent fees (both audit and non-audit services (hereafter NAS)) after the issuance of such an opinion is an important question. If there is an increase in fees that result from changing auditors after a going concern modified opinion, this suggests there may be other motivations for changing auditors after a going concern modified opinion. The primary purpose of this study was to derive possible explanations why firms dismiss their auditors after a going concern modified opinion. To accomplish this, I examined five research questions in the post-SOX period. First, I examined the relation between the issuance of a first-time going concern modified opinion and audit and NAS fees. Second, I examined the relation between the issuance of a first-time going concern modified opinion and auditor dismissal. Third, I examined the relation between auditor dismissal and audit and NAS fees. Fourth, I examined if there was a moderating effect of the issuance of a going concern modified opinion on the relation between auditor dismissals and audit and NAS fees. Finally, I examined why firms might purchase additional NAS from their new auditor after the issuance of a going concern modified opinion. Using multivariate regression analysis and a sample of 48,414 firm-year observations for the period 2004 – 2014 (sample included all publicly traded U.S. companies except financial institutions and utilities), my results indicated that there was a significant relation between the issuance of a first-time GCMO and audit fees. Contrary to expectations however, this relation was found to be negative indicating that these distressed firms actually incurred lower audit fees after receiving a GCMO. No significant relationship was found between the issuance of a first-time GCMO and NAS fees. In addition, consistent with prior literature, a positive relationship was found between a first-time GCMO and auditor dismissal. While a significant negative relationship was found between auditor dismissal and both audit and NAS fees, that relationship was no longer significant when a GCMO was present suggesting that firms who dismiss their auditors after a first-time GCMO do not experience a decrease in either audit fees or NAS fees. Furthermore, the evidence indicates that NAS were not purchased to compensate auditors for any additional risk or to compensate the auditor for lowballing, and NAS were not purchased in order to receive a better audit opinion.

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