Evaluating financial distress resolution using prior audit opinions*

Abstract

Abstract. Prior studies have examined whether audit opinions have incremental explanator>' power over financial statement data in predicting bankruptcy filings. However, recent regulatory pronouncements indicate that the auditor should attempt to predict impending financial distress (going-concern difficulties), not whether a firm will file for bankruptcy. This study compares the audit opinion to the resolution of a bankruptcy filing to determine whether prior claims of audit failures might be due to the auditor's focus on financial distress resolution rather than the act of filing for bankruptcy. We find that the audit opinion is a significant variable in a model explaining the resolution of a bankruptcy filing. However, the audit opinion did not predict resolution of bankruptcy proceedings with any greater accuracy than did a naive mechanical model.Resume. Des chercheurs se sont deja demande si I'opinion des verificateurs avait un pouvoir explicatif marginal par rapport aux donnees des etats financiers dans la prediction des depots de biian. Or, les reglements recemment promulgues prevoient que les verificateurs doivent tenter de predire !es difficuttes fmancieres imminentes (menaces a la permanence de I'entreprise), et non pas les depots de bilan, Les auteurs mettent en paralleic {'opinion du verificateur et Tissue des depots de bilan afin de determiner si les allegations formulees d'inaptitude des verificateurs peuvent etre attribuables a I'interet porte par le verificateur a la resolution des difficultes financieres de I'entreprise plutot qu'a Tacte du depot de bilan. Les auteurs concluent que I'opinion du verificateur est une variable importance dans un modele explicatif de Tissue des depots de bilan, mais qu'elle ne permet pas de predire Tissue du deroulement de la faillite avec davantage d'exactitude qu'un modele mecanique simple. IntroductionThe issuance of an tinqualified opinion by an auditor shortly before the company files for bankruptcy often receives substantial press coverage and generates lawsuits by investors against managemetit and the auditor. Because of such failures,

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An empirical analysis of auditor reporting and its association with abnormal accruals

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