AUDITOR SWITCHING AND CONSERVATISM

The relation between audit opinions and auditor switching has received considerable attention in recent years. Chow and Rice (1982) report a positive association between a firm's propensity to switch auditors and the receipt of a qualified opinion in the year prior to the switch.1 However, firms that switch auditors do not seem to receive ''improved'' opinions in the year following the switch (Chow and Rice 1982; Smith 1986). Despite this evidence, the Securities and Exchange Commission (e.g., Release No. 33-6594[1985] and Financial Reporting Release No. 34[1989]) and the popular financial press (e.g., Power 1984) continue to express concerns about opinion shopping. This study focuses on the auditor's opinion formulation process for switching and non-switching clients in the year prior to the switch. In particular, it examines the possibility that auditor switches are triggered not by the receipt of qualified opinions, but by auditors' use of conservative judgments for some clients. While conservatism refers to a number of accounting and auditing issues, the overall conservatism of the auditor is assumed to be reflected in a tendency to issue qualified opinions. An ordered probit model of the qualification decision is estimated with different threshold values for prospective switchers and non-switchers measuring different judgments applied to the two groups of clients. The results support the hypothesis that threshold values for switchers are significantly lower (more conservative) than those for nonswitchers. Further analysis of switching patterns suggests that when qualified opinions are based on conservative standards, the switching rate is higher than when average standards are applied. The observed conservatism could be the auditor's reaction to negative private information gathered during the audit that makes continued association with the client uneconomical or undesirable. However, the evidence indicating that opinions do not improve after switches suggests that opinion shopping is generally futile. This condition may exist because private information is obtained during the audit process, and a client usually will not be able to shop for a less conservative auditor with a prior commitment of a favorable treatment. Recent concerns about opinion shopping and its effect on auditor independence may therefore not be justified.