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March 1991

Second opinion, opinion shopping and independence.

by Espahbodi, Reza

    Abstract- Opinion shopping can adversely affect the independence of auditors. Opinion shopping is a different activity than obtaining a second opinion, which has the objective of obtaining the right answer. Instead, opinion shopping involves finding an auditor who supports a proposed accounting method that will help an organization achieve its reporting objectives, even if the accounting method affects reliable reporting. Auditors may agree to questionable accounting practices for many reasons, including competition among accounting firms, the tendency to regard generally accepted accounting principles as rules to be manipulated, and the complexity of financial instruments. The methods of discouraging opinion shopping include requiring disclosure of opinion shopping, implementing peer review programs, and creating an accounting appeals board.

Why do people seek second professional opinions on a wide variety of matters? A second opinion is standard procedure in medical practice when a patient is faced with major surgery, and this procedure is not uncommon in some aspects of dentistry. Second opinions are frequently sought when appraising valuable and unusual property, and are generally required by insurers. In complex legal matters, businesspeople feel more comfortable with a second opinion from a lawyer.

Being wrong-performing unnecessary or unsuccessful surgery, or taking or failing to take a particular course of action, can lead to severe penalties and other consequences in today's complex environment. If businesspeople are found wrong, they want to be able to demonstrate that they consulted fully with competent and knowledgeable professionals. SEEKING A SECOND OPINION OR OPINION SHOPPING?

Certainly, this scenario applies to the accounting profession as well. Numerous intricate financial transactions with uncertain results under tax laws and government regulations are commonplace. The accounting in many of these cases is not a matter of arithmetic, but of classification and disclosure, where judgmental decisions are the paramount factors in reaching an opinion. Management has prime responsibility for financial statements and is acting prudently when incurring the cost of a second opinion on innovative and complex transactions.

Unfortunately, it is clear that the search for a second opinion is not always motivated by a desire to be right. Some managers have a preconceived objective in mind that can only be achieved by using a particular, and usually less desirable, accounting treatment. They will seek the views of successive accountants until they locate the one who will approve the desired treatment. This agreeable accountant will receive a reward in the form of appointment as the business's auditor. This insidious practice is not the seeking of a second opinion; it is opinion shopping.

Opinion shopping has been a topic of discussion for the past decade. It has been the subject of SAS 50 and SEC reporting release FRR 31. It has been discussed in SEC enforcement releases, AAERs 14, 32, 54, and 220 and was considered by the Treadway Commission. It has been a factor in several alleged audit failures.


Opinion shopping was defined by the SEC, in FRR 31, as the practice of seeking an auditor willing to support a proposed accounting treatment designed to help a company achieve its reporting objectives even though doing so might frustrate reliable reporting. The reporting objectives envisioned in opinion shopping would be to improve reported operating results or the financial condition, by obtaining an interpretation of GAAP that is not consistent with those of the past or with the economic substance of a transaction, or by obtaining support for a change to a less preferred or marginally acceptable accounting treatment.

Opinion shopping is not limited to public companies, which have particular concern about earnings per share reporting. it is a factor in private companies seeking bank loans or other financing, and for nonprofit organizations that issue financial statements to the public and must report under governmental regulations.


Several factors motivate managers to shop for opinions, including the desire to attain or exceed stated goals and objectives and, in extreme cases, the urgent need to survive. Managers want their audit reports to be positive (unqualified). Negative reports may affect their own compensation, their company's ability to market securities, and the value of their own holdings in the company. Motivation to shop for opinions can be enhanced by deteriorating economic conditions, trying to avoid hostile takeover attempts, and by having compensation plans tied to reported income.

it seems clear that companies do indeed shop for opinions. But the extent of the practice may be underestimated because public disclosures probably do not reveal the underlying reasons for changing auditors. Even reports to the SEC of auditor changes and related disagreements on Form 8-K do not necessarily disclose the real reasons. The requirement of reporting disagreements has sometimes been avoided by keeping discussions between auditor and client from reaching a disagreement stage, by changing auditors in anticipation of a qualified opinion, or by waiting to change auditors until two years after a disagreement and receipt of a qualified opinion. Displaced auditors also seem reluctant to report disagreements or to accuse ex-clients of opinion shopping, as it may result in lawsuits, loss of trust, or a reputation for whistle- blowing-any one of which may adversely affect the recruiting, retaining, or regaining of clients.


Certainly a case can be made that opinion shopping has negative effects. It can adversely affect the fact, or at least the appearance, of auditor independence. For example, the auditor may follow the desires of management rather than lose the client, even if this will result in an accounting or a disclosure practice less than optimal. Even if the auditor does not accede to management, users' awareness of opinion shopping could lead them to suspect subservience. The appearance of independence would be compromised. Opinion shopping can also impair credibility of financial statements and the quality of investment and credit decisions. Opinion shopping is not without hazards to the agreeable accountant. Manipulated financial statements often lead to a business's undoing, as has been the case recently with many over- extended financial institutions. The resulting injury to auditors' reputations, and possible damages will surely inhibit accountants from participation in opinion shopping. To summarize, opinion shopping may affect: 1) auditor's independence; 2) credibility of financial reports; 3) quality of investment and credit decisions; 4) credibility and professional standing of the accounting profession; and 5) the reputation of accounting firms.

The AICPA and the SEC have taken actions to deter opinion shopping but many cases are likely to go unreported for reasons such as concern for client recruiting and retention. But these actions are directed at symptoms, rather than causes, of the problem.


Opinion shopping raises serious questions about auditor independence. Harold Williams, former Chairman of the SEC, put the problem into perspective when he stated before the Metcalf Committee in 1977:









Other factors may contribute to auditors' acquiescence to questionable accounting or auditing practices. One is competition among accounting firms. Michael Cook, then managing partner of Deloitte Haskins & Sells and 1986-87 Chairman of the AICPA, was quoted:







Another factor is the general tendency to view the entirety of GAAP similar to the IRC and Treasury Regulations, as laws or rules to be interpreted and manipulated, rather than applied in a spirit of professional judgment. Thus, some clients may insist on use of a proposed method unless it can be shown to be specifically forbidden by a GAAP pronouncement.

Yet another factor is the increasing complexity of business arrangements and financial instruments. Ironically, accounting may both be a cause of and be affected by this complexity. That is, the flexibility to choose among alternative accounting methods for recording the same or similar events (e.g., leases) may encourage clients to develop new arrangements or instruments to fill a perceived vacuum or to circumvent existing GAAP. Clients then pressure auditors to accept proposed methods or to request new or revised accounting standards. Clients may enter into uneconomic transactions, e.g., understating and under-reporting contingencies, or "off-balance-sheet financing."

Penalties imposed for violations of the AICPA Code of Professional Ethics, GAAP, SEC regulations, and state and federal laws are not effective deterrents to questionable practices.


Disclosure Expanded disclosures of auditor changes and required disclosure of opinion-seeking and related situations could discourage opinion shopping. Recent rules adopted by the AICPA's ASB and by the SEC would help. The SEC Practice Section of the AICPA's Division for CPA Firms (SECPS) amended its procedures manual to require member firms to adopt policies on providing advice on application of GAAP to non-audit clients and to have those policies tested during peer reviews.

The AICPA's recent bylaw amendment has made SECPS membership mandatory for all accounting firms having SEC clients. SAS 50, Report on the Application of Accounting Principles," establishes performance and reporting standards to be applied when an accountant gives a written report or oral advice to a non-audit client on application of GAAP.

Although these are important steps, they are not likely to result in disclosure of all actual or potential opinion shopping. For example, when an auditor acquiesces to management's questionable proposal in order to avoid losing the client, independence would be compromised to the same extent as when another CPA agrees to management's position, prior to engagement as the auditor, yet nothing would be reported since no consultation has taken place. in response to suggestions of seven major accounting firms and others, the SEC amended its disclosure requirements to obtain more information on circumstances that led to a change in accountants as well as those that imply opinion shopping.

Expanding required disclosures may enhance an auditor's independence, quality of financial reporting, credibility of the profession, and status of the accounting professional; but the effects are not likely to be substantial when there is a resistance to "telling all."

Peer Review

The requirements that peer review be mandatory, that the reviewer be independent, and that more emphasis be placed on evaluating applications of accounting principles, could prevent some opinion shopping situations. Recent moves in this direction include: 1) the suggestions by accounting firms and NCFFR to make peer review mandatory; 2) the change in the SECPS procedures manual requiring peer review of adherence to policies on providing GAAP advice to non-audit clients; 3) the AICPA bylaw amendment that requires accounting firms with SEC clients to be members of the SECPS, which requires peer review for members; and 4) mandatory quality review for all firms whose owners and employees are members of the AICPA. Mandatory and expanded review requirements would be expected to increase costs more for small firms than for large ones and might have some impact on small firms seeking audits of public companies. This should be offset by enhancement of the quality of auditing and financial reporting, credibility of the profession, status of the accounting professional, and by the possibility of some improvement in auditor independence.

The Accounting Court Remedy

Establishing an accounting appeals board or accounting court could provide recourse for auditors and clients in opinion shopping and other situations. Some aspects of this currently exist on an ad hoc basis through the FASB's Emerging Issues Task Force and auditor-registrant consultations with the SEC's Chief Accountant. The accounting court proposal could be expanded to include provisions for sanctions. The cost of this proposal could be substantial, but so could the benefits.

An appeals board that would have jurisdiction in settling a wide range of accounting questions, problems, and disagreements probably also would need a statutory mandate; but it could fill a void that currently exists and be effective in enhancing auditors' independence. Many view this possible remedy at or near the bottom of any list of proposed remedies.

The Management Exclusion Remedy

Excluding management from auditor hiring-paying-firing could deter opinion shopping. This might possibly be accomplished through an effective audit committee. An audit committee should consist of outside board members that have no conflict of interest vis-a-vis management and that act as a watchdog for shareholders. it should hire the auditor, review accounting policies and financial reports, and approve an auditor's replacement-on an advice and consent basis or, possibly, controlling proxy votes for selection of auditors. An ASB statement requires auditors to communicate with audit committees about several important issues including selection of accounting policies and accounting for unusual transactions, but stops short of assigning any responsibilities to audit committees.

Auditor Rotation

Placing statutory restrictions on a client's ability to replace the auditor, or requiring long-term auditor appointments could reduce opinion shopping. In some Australian jurisdictions, for example, the auditor continues on an engagement until death, removal for cause, resignation, or loss of capacity to act. In the United Kingdom, clients cannot remove auditors without good reason and this can be done only at a shareholders' meeting for which shareholders have received a special notice and the auditor has been given the right to inform shareholders of his or her position; also, if an auditor resigns, the resignation is not valid unless it indicates that no circumstances relating to the resignation should be reported to shareholders. Many other countries have substantial restrictions on changing auditors. The major problems with these remedies relate to increased government involvement and foreclosure of entry. Mandatory rotation of auditors every five to seven years was suggested by the well known accountant, J. S. Seidman, in recognition of the independent auditor's primary responsibility to the public, and again in the mid-1970s as an extension of the consumer movement and Congressional investigations.

Rotation of auditors would likely increase costs because of economies that occur on successive audits and the need for an agency such as the SEC to supervise the rotation process. The presently required rotation of the partner assigned to audits of SEC clients should achieve some if not most of its benefits perceived in rotation.

The Sanctions Remedy

Enforcing existing sanctions for negligent behavior of an auditor or inappropriate behavior of a company, and increasing the severity of such sanctions, could reduce opinion shopping and other inappropriate activities. John Biegler, then managing partner of Price Waterhouse, stated:









Currently, the AICPA's Public Oversight Board (POB) and Quality Control Inquiry Committee QCIC-previously called the Special Investigations Committee) have no authority to impose sanctions. Cases are referred by QCIC to the AICPA Professional Ethics Division for investigation. In the 10-year period ending June 30, 1989, 14 cases were so referred. The Ethics Division appears to be primarily a clearinghouse that refers reported cases to ethics committees and trial boards, and then terminates or suspends members after receiving their reports. The Ethics Division also terminates and suspends members as a result of state accountancy boards' actions and felony convictions in courts. This appears to the authors to be too little and too late. One reason is that the Ethics Division does not investigate a case until after litigation has been concluded." Another reason is that QCIC does not directly investigate cases in which lawsuits have been reported to avoid being drawn into litigation; instead it investigates these cases indirectly by looking into other audits that were supervised by the professional involved in the allegedly faulty audit.

This indirect approach is likely to be inefficient and ineffective in finding the cause of the problem and is not likely to result in the most appropriate corrective action. AICPA sanction now has more serious consequences for firms that audit SEC registrants as a result of making membership in the SECPS mandatory. Effective imposition of appropriate sanctions (e.g., permanent expulsion of auditors who perpetrate serious infractions or are determined to be incorrigible) would enhance auditors' independence.

The Statutory Remedy

A self-regulatory organization (SRO) similar to the National Association of Security Dealers (NASD), or as proposed by Price Waterhouse in 1985 that would be established by statute and subject to SEC oversight, would be one way to implement several of the remedies considered herein. The profession may be required to give up some freedom, but it would retain self-regulatory status and would gain many benefit,,). The Education Remedy The authors believe that strengthening the theoretical knowledge base of the accounting profession and increasing educational requirements of entering professionals will enhance the professional autonomy of auditors, and could alleviate some opinion shopping situations. To ensure the continued professional development of accountants, the accounting profession could require periodic recertification of CPAs.


Getting a second opinion is a reasonable approach to dealing with complex matters. Although more common in other professions, when undertaken in an open and forthright manner it can help companies reasonably assure that the proper treatment is given. A second opinion is not opinion shopping. Opinion shopping is not a search for the right answer, it is the search for the answer that the shopper wants to hear. Auditor independence, the credibility, role, and status of the accounting professional and profession, and the reliability of financial reports, can be substantially affected by opinion shopping. Remedies to which the authors subscribe include expanding required disclose requiring mandatory peer review and increased emphasis on evaluation of applications of GAAP, establishing an accounting court, excluding management from auditor hiring-paying-firing decisions, mandatory rotation, increasing sanctions on auditors and clients, establishing a self-regulatory organization of public accountants, and strengthening the theoretical knowledge base of accountants. Other remedies, such as having the federal government assume responsibility for the attest function or establishing more uniform accounting principles, have been suggested but have not been included herein because of their inconsistency with the U.S. free-enterprise system and of their adverse effects on accounting and reporting and on the accounting profession.
















































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