Comment letters and internal control opinion shopping

Abstract

Taking Chinese A-share listed firms from 2015 to 2017 as our samples, this paper investigates the supervision effect of comment letters on internal control opinion shopping at audit firm level, branch level and signing partner level respectively. The empirical results show that the pressure from comment letters can significantly decrease the probability of internal control opinion shopping at both audit firm level and signing partner level. This supervision effect is more pronounced when there are internal-control-related questions in comment letters or the firm’s annual auditor is required to give opinions on some questions in comment letters. As for the branch level of audit firms, it is found that the supervision effect of comment letters on internal control opinion shopping is more pronounced in the firms which switch from headquarters to branches. We also find comment letters have spillover effects on firms in the same industry, in the same province or with the same auditors.