In this study, we attempt empirically to investigate the relationship between audit quality and the probability that a financially distressed company would receive a going-concern opinion. Auditor decision-making in the presence of going-concern uncertainties may be characterized as a two-stage process. The first stage is the identification of a potential going-concern problem and the second stage is to determine whether the particular company should receive a qualified going-concern opinion. A sample of 1,199 non-financial Spanish company-years has been obtained from the database issued by the Stock Exchange National Commission for the fiscal years ending between December 1991 and December 2000. The results indicate that audit quality (measured by the auditor's level of independence and knowledge) affects the probability that a financially distressed company would receive a going-concern opinion. This probability is influenced not only by the auditor's ability to detect financial uncertainties, but also by the auditor's decision-making as to what type of opinion should be finally issued.

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The study of the auditor changes in Spain is extremely interesting because of the characteristics of the Spanish audit market. Spanish legislation does not impose any limits upon companies to change auditors. Auditors have no possibilities to defend themselves when companies decide to resign the contract. In this context, the study of the relationship between audit opinion and auditor change can highlight the probability of a company's strategic behaviour to avoid receiving a qualified audit opinion in the future. Thus, we analyse the relationship between the auditor change following a qualification and the probability of obtaining a clean audit report in the following year.The quality of the auditing performed in the company changes if the company changes its auditor, because the quality of the new auditor's work is different from its predecessor. Using a variety of surrogate measures to infer the relative quality of the newly contracted audit firm, such as the specialization, size, brand name, technology and conservatism, we examine the effect of auditor changes on audit quality.If a company can perceive the level of quality supplied by its auditor, it can look for a lower quality auditor to increase the probability of obtaining a clean report in the next year. Thus we introduce the direction of the auditor change as a strategic mechanism to improve the audit opinion. We relate the previous auditor quality measures with the probability of receiving an audit qualification after the change. The results obtained In this paper we investigate whether Spanish firms employ deliberate strategies in the choice of auditor to avoid audit qualification. For a sample of 735 during the period 1991-96 we found no increase in the probability of changing auditor following an audit qualification. We concluded that this would be too obvious and detrimental to the firm's interests. However, 135 firms do change auditor during the period examined. We found that firms that have been qualified are significantly less likely to move to higher quality auditors than are unqualified firms, when that quality is measured by the specialisation of the auditor, auditor brand name, auditor size and auditor conservatism. For the 92 qualified firms changing auditor the likelihood of a subsequent qualification is significantly related to the quality of the auditor selected.in the paper show that those firms which have been qualified are significantly more likely to contract lower quality auditors than are unqualified firms. In addition, the likelihood of a subsequent qualification when qualified firms change auditor is significantly related to the quality of the new auditor selected.Given these results we analysed whether external monitoring can limit this strategic behaviour. We consider two types of external control: the control that the National Stock Exchange Commission (Comisión Nacional del Mercado de Valores) has over the quoted companies and the control of the Spanish National Bank over the financial firms. In these cases, the probability o...

In recent international debates on auditing regulation, Spain has assumed a real prominence as a claimed practical example of where a policy of mandatory audit firm rotation did not work and was duly abolished. This study provides an analysis of the implementation and removal of such policy in Spain. Using the evidence provided by congressional hearings, financial newspapers and other documents we demonstrate that at no stage was mandatory rotation of audit firms ever enforced on Spanish auditors. Further, the revision and subsequent removal of the Spanish law on mandatory rotation emerges as a rather politicised process, with no reference being made in the process of legislative reform to Spanish auditing experiences. A clear implication of the paper is that considerable caution needs to be taken in today's international auditing arena when analysing the standpoints and claims made by professional associations and the evidence they provide to support their arguments for and against regulatory reform.