The Effects of Regulated Auditor Tenure on Opinion Shopping: Evidence from the Korean Market

Beu Lee (), George Gamble, Thomas Noland and Yuping Zhao
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Beu Lee: Department of Accounting and Finance, College of Business, Texas A&M University-San Antonio, San Antonio, TX 78224, USA
George Gamble: Department of Accountancy and Taxation, C.T. Bauer College of Business, University of Houston, Houston, TX 77004, USA
Thomas Noland: Department of Accountancy and Taxation, C.T. Bauer College of Business, University of Houston, Houston, TX 77004, USA
Yuping Zhao: Department of Accountancy and Taxation, C.T. Bauer College of Business, University of Houston, Houston, TX 77004, USA

JRFM, 2024, vol. 17, issue 11, 1-28

Abstract: We examine the impact of regulated auditor tenure on the shopping for favorable audit reports. We predict that these regulations may affect auditors’ willingness to acquiesce and clients’ incentives to engage in opinion shopping. We draw from the unique Korean setting where both mandatory audit firm retention and mandatory rotation were implemented for all public firms in a staggered manner. Based on hand-collected audit reports, we identify harmful language in explanatory paragraphs. We define favorable audit reports as those with unqualified opinions and without any harmful explanatory language. We find that opinion shopping for favorable audit reports appears to subside after mandatory retention but increases after mandatory rotation, with the positive impact of mandatory retention offset by the negative impact of mandatory rotation. We add to the literature by examining the impact of regulated auditor tenure on opinion shopping and highlighting the potential unintended consequences of these regulatory attempts.

Keywords: opinion shopping; mandatory retention; mandatory rotation; regulated tenure; audit quality (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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