To Hide Behind the Mask of Mandates: Disguised Opinion Shopping Under Mandatory Audit Firm Rotation and Retention in Korea

This study investigates whether audit tenure mandates—designed to curb managerial discretion—may unintentionally enable disguised opinion shopping. Specifically, it examines whether firms benefit from observed mandates that align with their unobservable preferences, despite appearing to comply with mandatory audit firm rotation or retention rules. A counterfactual framework is developed to estimate firms’ preference for switching or retention in the absence of regulation, allowing identification of strategic alignment under constraint. Empirical analysis using Korean data from 2000 to 2009 reveals that firms classified as disguised opinion shoppers are more likely to receive unmodified audit opinions and exhibit lower audit quality, as indicated by higher discretionary accruals and more frequent reporting irregularities. These effects are concentrated under mandatory retention and not observed under rotation, suggesting that forced auditor turnover weakens firms’ ability to secure favorable outcomes. Additional evidence shows that these firms are more likely to retain the same auditor after mandates expire, consistent with a reward-for-accommodation mechanism. Thus, this study not only provides empirical evidence that opinion shopping can persist under auditor tenure mandates, but also introduces a novel method for identifying such behavior when traditional signals—such as voluntary dismissals—are unavailable. These findings inform ongoing regulatory debates on the effectiveness of tenure-based reforms.

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Publication Details

Journal
Journal of risk and financial management
Published
2025-07-25
DOI
https://doi.org/10.3390/jrfm18080410
Primary Topic
Auditing, Earnings Management, Governance
Type
article
Field-Weighted Citation Impact
0.00
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article

To Hide Behind the Mask of Mandates: Disguised Opinion Shopping Under Mandatory Audit Firm Rotation and Retention in Korea

Beu Lee
Journal of risk and financial management
Auditing, Earnings Management, Governance
article

To Hide Behind the Mask of Mandates: Disguised Opinion Shopping Under Mandatory Audit Firm Rotation and Retention in Korea

Beu Lee
article en

Abstract

This study investigates whether audit tenure mandates—designed to curb managerial discretion—may unintentionally enable disguised opinion shopping. Specifically, it examines whether firms benefit from observed mandates that align with their unobservable preferences, despite appearing to comply with mandatory audit firm rotation or retention rules. A counterfactual framework is developed to estimate firms’ preference for switching or retention in the absence of regulation, allowing identification of strategic alignment under constraint. Empirical analysis using Korean data from 2000 to 2009 reveals that firms classified as disguised opinion shoppers are more likely to receive unmodified audit opinions and exhibit lower audit quality, as indicated by higher discretionary accruals and more frequent reporting irregularities. These effects are concentrated under mandatory retention and not observed under rotation, suggesting that forced auditor turnover weakens firms’ ability to secure favorable outcomes. Additional evidence shows that these firms are more likely to retain the same auditor after mandates expire, consistent with a reward-for-accommodation mechanism. Thus, this study not only provides empirical evidence that opinion shopping can persist under auditor tenure mandates, but also introduces a novel method for identifying such behavior when traditional signals—such as voluntary dismissals—are unavailable. These findings inform ongoing regulatory debates on the effectiveness of tenure-based reforms.

Journal of risk and financial managementVol. 18(8)
Texas A&M University – San Antonio (US)
Openalex Percentile: Top 71%
Auditing, Earnings Management, Governance
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