The effect of the rules- versus principles-based accounting standards on opinion shopping
ISSN: 0268-6902
Article publication date: 15 November 2022
Issue publication date: 28 February 2023
Abstract
Purpose
The purpose of this study is to examine whether the change in accounting standards from the rules-based local GAAP to the principles-based IFRS influences a manager’s opportunistic auditor choice for a favorable audit opinion, opinion shopping (OS) behavior. The authors view that IFRS adopters exploit the flexibility of IFRS to their advantage and search for auditors that are more likely to give clean opinions. However, auditors may refuse to yield to client pressure for OS, because of the greater potential audit risk under principles-based standards.
Design/methodology/approach
This study applies a difference-in-differences methodology by using Korean listed firms (i.e. IFRS adopters) as a treatment sample and Korean unlisted firms that do not voluntarily adopt IFRS (i.e. K-GAAP users) as the control sample. OS behavior is measured by the methodology of Lennox (2000).
Findings
The results of this study show that the OS behavior of IFRS adopters increases after IFRS adoption compared to that of K-GAAP users. This phenomenon is more prevalent when they are audited by non-Big 4 auditors or when they are economically important to auditors. These suggest that the principles-based IFRS without specific rules increase the scope of OS, and auditors tend to accept OS clients by weighing up its costs and benefits.
Originality/value
This study contributes to the literature on OS by presenting that the approach of accounting standards can be an important influencing factor on a firm’s successful engagement in OS. This finding also provides policy implications for many economies by suggesting mechanisms that can be developed to reduce clients’ opportunistic auditor choices under principles-based accounting standards.
Keywords
Acknowledgements
The authors appreciate the helpful comments and suggestions of the editor, two anonymous reviewers, Sunhwa Choi, Jong-Hag Choi, Woo-Jong Lee, Sejoong Lee and the seminar participants at the Korean Accounting Association and Seoul National University. This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2020S1A5A8042060).
Citation
Chung, H. and Kim, Y. (2023), "The effect of the rules- versus principles-based accounting standards on opinion shopping", Managerial Auditing Journal, Vol. 38 No. 3, pp. 264-287. https://doi.org/10.1108/MAJ-12-2020-2964
Publisher
:Emerald Publishing Limited
Copyright © 2022, Emerald Publishing Limited