Do Managers Successfully Shop for Lenient Auditors? Evidence from Accounting Estimates

Abstract

We test whether managers successfully shop for auditors who are lenient towards opportunistic accounting practices, as evidenced by income-increasing changes in accounting estimates (POSCHG). We find an increase in the frequency and magnitude of POSCHG following auditor switches. We further find that companies reporting POSCHG following an auditor switch are more likely to subsequently restate earnings, receive fewer going-concern opinions, and experience lower stock returns. In contrast, we do not find any of these results for income-decreasing changes in estimates. Using manually collected data, we show that our results are driven by discretionary POSCHG that are not initiated or verified by third parties. Finally, we document that switchers maximize the ex-ante likelihood of reporting POSCHG, and are more likely to choose auditors whose clients have a greater likelihood of reporting POSCHG. Taken together, our paper documents that managers successfully shop for auditors that are lenient towards income-increasing changes in estimates.