Opinion Shopping

What Is Opinion Shopping?

Opinion shopping is the practice of searching for an outside auditor willing to provide a favorable view of a company's financial condition. Securing a positive assessment, known as an unqualified opinion, leads the public to believe that the company's financials are fairly presented and conform to generally accepted accounting principles (GAAP), helping it to secure funding at more advantageous rates from lenders and maintain the support of investors.

Understanding Opinion Shopping

The Securities and Exchange Commission (SEC) requires all public companies to open up their books to external auditors and present the findings in their annual filings (Form 10-K). These reviews come in the form of an accountant's opinion: a statement by an independent auditor expressing its view regarding the quality of information contained in a set of financial reports.

An accountant's opinion can be qualified or unqualified. If the opinion is qualified, the accountant has questions about the company's accounting principles and/or the scope of the information provided. When a company goes opinion shopping, it is seeking an unqualified opinion that finds the company's financial statements to be fairly presented, in all material respects, and in accordance with GAAP. 

The opinion issued by an auditor can have huge implications. Statements expressing concerns regarding the quality of information contained in a set of financial reports may likely put investors off the company. It can also make it harder to convince financial institutions (FIs) to lend it money and result in a credit rating downgrade, increasing the challenges of raising new capital.

As a result, some companies choose to engage in opinion shopping, the dubious practice of finding an auditor who will overlook any shortcomings in its financial reporting. They do so, despite being aware that such behavior is frowned upon by regulators. 

History of Opinion Shopping

Opinion shopping is prohibited by the Securities and Exchange Commission (SEC) and has been a hot topic among regulators, particularly since financial scandals in the early 2000s involving publicly traded companies such as Enron Corporation, Tyco International plc, and WorldCom.

Laws designed to stamp out fraudulent financial reporting, such as The Sarbanes-Oxley Act of 2002, don't appear to have made opinion shopping any less prevalent, though.In 2019, the American Accounting Association (AAA) published research showing that over half of U.S. businesses in financial difficulty persistently seek out auditors willing to issue them with afavorable opinion.From a pool of over 3,500 distressed public companies in the U.S. spanning a nine-year period, the AAA discovered that 57 percent shopped for opinions. These measures appeared to pay off, too. According to the research, only 16 percent of offenders were issued with going concern opinions — statements that express substantial doubt about a company’s ability to continue — compared to 28 percent among non-opinion shoppers.

Special Considerations

Identifying Opinion Shoppers

News that opinion shopping is still a widespread practice should perhaps make us suspicious of any company that suddenly changes its audit firm. It’s reasonable to assume that any listed entity willing to incur the costs of switching auditor wants something significant in return.

Accountants, too, face start-up costs when taking on a new client. Until these costs are recovered, it could be argued that they are under greater pressure to issue glowing assessments. Companies have been known to fire auditors when they disclose critical information about their accounting practices. That will play on auditor’s minds, as will the logic that a reputation as being easy-going and flexible should likely help them to secure more business.

Still, seeking out a second opinion doesn’t necessarily always mean that something is amiss. As in other professions, public accountants can have different opinions about the many interpretations and judgment calls that are involved in preparing the financial statements of large, complex corporations. Companies are free to consult with other accountants. They might, innocently, opt to choose a new auditor more in tune with their way of doing business or to save on audit fees by choosing a cheaper competitor. 

In other words, it’s not easy to determine if changes are made purely to engineer more favorable opinions. Perhaps the most telling sign is when a company consistently jumps from one auditor to the next. Alternatively, it could raise suspicion if a company switches from a reputable big four accountancy firm to a smaller one desperate to bag new clients and keep them sweet.