Audit quality and the going-concern decision-making process: Spanish evidence

Abstract

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.

Audit firm tenure and audit qualifications in Spain: a multinomial approach

“…Louwers (1998) and Carcello and Neal (2000), with samples of US financially distressed firms, did not find a negative effect of tenure on the auditors' reporting decision. A similar conclusion was reached by Vanstraelen (2002) and Knechel and Vanstraelen (2007) for the Belgian market, and by Ruiz-Barbadillo et al (2004) and for the Spanish market. This evidence supports that the litigation risk faced by the auditor when an unqualified report is issued to a company which deserves an audit report with GCMO would offset the 'familiarity threat' associated to long tenures with the audit firm.…”

“…Evidence reported about the lack of a negative effect of tenure on independence measured through GCMO supports available evidence for the Spanish market (Ruiz-Barbadillo et al, 2004 and.…”

“…Prior research on the effects of tenure on the likelihood of audit qualifications has been carried out through the classical logistic regression approach (e.g., Vanstraelen, 2000;Ruiz-Barbadillo et al, 2004Knechel and Vanstraelen, 2007) with a dependent binary variable coded 0 in case of an unqualified audit report and coded 1 in case of an 'unclean' report. While most papers only account for GCMO, when this is not the case, all types of audit qualification are coded 1, independently of their nature.…”

Audit tenure and audit Qualifications in a low litigation risk setting: An analysis of the Spanish market

“…However, after the expiration of the initial contract the company could renew the contract with the same auditor on a yearly basis. A consensus exists that Spanish legislation has not been particularly strict in specifying safeguards to strength auditor independence [Gonzalo, 1995;Paz-Ares, 1996;Ruiz-Barbadillo et al, 2004]. Although, from a legal point of view a company can break its audit contract only if a 'just cause' exists, since the Law does not clarify what this just cause may be [Gomez and Ruiz-Barbadillo, 2000], a company can, therefore, hire and fire its auditor without any time limitation.…”

“…Previous research has addressed the relationship between audit tenure and the nature of the audit report by focusing on audit qualifications for reasons of going concern and analyzing financially distressed companies [Menon and Schwartz, 1985;Carcello and Neal, 2000;Vanstraelen, 2000;Vanstraelen, 2002;Ruiz-Barbadillo et al, 2004;Carey and Simnett, 2006;Knechel and Vanstraelen, 2007;Lim and Tan, 2010;Gul et al, 2011]. Such approach faces some advantages and disadvantages.…”