Do Managers Successfully Shop for Auditors Who Allow Them to Opportunistically Report Positive News? Evidence from Accounting Estimates

Prior auditor shopping literature examines managers’ attempts to opportunistically underreport negative news by finding auditors who will allow them to avoid negative audit opinions or underreport goodwill impairments or financial misstatements. We advance this literature by examining management attempts to opportunistically report positive news, as captured by income-increasing changes in accounting estimates. Adapting a previous framework, we find that, ex ante, managers are more (less) likely to dismiss their auditor if it increases (decreases) the expected likelihood of reporting income-increasing changes in accounting estimates (POSCHGs). We also find that, ex post, following auditor dismissals, the frequency and magnitude of POSCHGs increase, and companies reporting POSCHGs are more likely to restate earnings, receive Securities and Exchange Commission comment letters related to estimates, meet or beat earnings targets, and less likely to receive going concern opinions or violate debt covenants. Placebo tests show that none of the above results hold for income-decreasing changes in estimates. Finally, we identify several institutional factors that constrain managers’ ability to shop for lenient auditors, including the quality of the successor auditor and strong corporate governance. Collectively, our findings are consistent with managers successfully shopping for auditors who allow them to opportunistically report positive news following auditor dismissals. This paper was accepted by Ranjani Krishnan, accounting. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2024.05299 .