A 2002 study estimated that opinion shopping was

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A 2002 study estimated that “opinion shopping” was behind 17% of auditor switches in the late 1990s, with most of these tending to occur later in the fiscal year. But companies also switched auditing firms at that time to evade anticipated bad news in the form of going-concern opinions. Interestingly, another study of pre-SOX switches found that after companies changed auditors, their financial statements exhibited higher levels of earnings manage- ment. As you might expect, the very fact that a public company sought a new auditing partner sometimes had a significant, negative effect on its stock price because the change was interpreted as a sign of trouble. After the demise of Arthur Andersen, however, many former Andersen clients that were more visible in the capital markets switched auditors sooner (mostly to Big 4 firms) and experienced a more positive market reaction as a result. A 2007 study found that, after the collapse of Enron, higher-quality audit committees more quickly dis- missed Andersen and chose a Big 4 firm as a successor. Not surprisingly, many ex-Andersen clients released more conservative financial statements after they switched to a new firm. (For more on this subject, see “Did Earnings Conservatism Increase for Former Andersen Clients?” in the Spring 2007 issue of the Journal of Accounting, Audit- ing, and Finance .) There have been a few studies of recent auditor switches, but not many. One study found that non-Big 4 auditors have become more conservative and are more prone to constrain earnings management than in the past. Researchers have also concluded that more effective audit committees are more likely to recommend hiring new auditors if the present firm has received a deficient inspection report from the Public Company Accounting Oversight Board (PCAOB). 5 0 STRATEGIC FINANCE I January 2011 FAR STUDY Prior to December 2003, both switchers and nonswitchers were equally likely to have a Big 4 auditor. That’s no longer the case.
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What Our Survey Revealed Because of the dearth of research studying current per- ceptions of post-SOX/Andersen switches from the client’s perspective, we set out to shed new light on this issue by asking the following questions: How are companies that experienced a voluntary, post-SOX/Andersen switch different from those that didn’t? From the companies’ perspective, is there a com- mon explanation for these switches? Are companies that switched auditors happier with their current auditor? Are companies that switched auditors as happy as companies that have stuck with the same auditor since the passage of SOX? We surveyed 175 IMA® members by requesting data describing their company’s auditor relationship(s) post- SOX/Andersen. If respondents were unable to provide us with this data, they could opt out of the survey at any time. None did. Respondents represented both publicly traded and privately held companies. Of the 175 respon- dents, 51 reported an auditor switch sometime after December 31, 2003. A switch after this date would be both post-SOX and voluntary (in other words, not mandatory because of Andersen’s demise in 2002). We included the 124 respondents who reported no auditor switch to compare the current levels of satisfaction
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  • Spring '08
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