Audit Qualification, Firm Litigation, and Financial Information: an Empirical Analysis in Greece

Abstract

In this study, we test the extent to which combinations of financial and non-financial information can be used to enhance the ability to discriminate between the choices of a qualified or unqualified (clean) audit report. Several models have been developed to explain qualifications in audit reports. The general consensus of these models has been that financial and non-financial factors dominate the audit opinion decision. In the USA, the Statement of Auditing Standards (SAS) No. 59 provides guidance for auditors to provide more critical evaluations to identify the possibility of qualifications problems. It identifies the conditions that an auditor should consider in evaluating going-concern status. These conditions include financial problems and operating problems. The standards also provide guidance on two other types of information, negative trends (operating losses) and other indicators, including internal matters, e.g., losses, and external matters (legal proceedings). For the most part, prior studies have not used any other qualitative variable(s) as indicators when developing audit opinion models. These qualitative indicators of potential solvency problems indicate year's losses and bad news characteristics, as firm litigation. TheIn this study, we test the extent to which combinations of financial and non-financial information can be used to enhance the ability to discriminate between the choices of a qualified or unqualified (clean) audit report. We examined the financial statements, the opinions of the auditors, and the notes to financial statements for companies that received a qualified audit report and for those that received an unqualified audit report. The data are taken from a sample of 100 Greek companies. Logistic and OLS regression models were estimated to assess the effect of firm litigation and financial information on audit qualification opinion. The qualification decision is associated by financial information such as financial distress and by non-financial information such as firm litigation. The model developed is accurate in classifying the total sample correctly with rate 78%. This study has implications for internal and external auditors and company decision makers.importance of these other qualitative indicators (firm litigation) in the auditor's decision has not been tested.The objective of the study was to develop a model based on financial information and other indicators, such as firm litigation, to explain qualifications in audit reports of Greek companies. The model will provide information on the likelihood of a company's receiving a qualification given its financial data and firm litigation data. This kind of model can serve as a decision aid for auditors when predicting what opinion other auditors would issue in similar circumstances, when evaluating potential clients, in determining the scope of an audit for existing clients, in peer reviews, to control quality within firms, and as a defence in lawsuits.Univariate tests (t-tests and chi-squared tests) and logistic and OLS ...

Auditor awareness of earnings management

“…Moreover the most pronounced difference was shown to be the ratio of ROA even before the restatements prescribed by auditors' opinions take place. Qualitatively similar were the results reported by Spathis (2003) for a sample of qualified and non-qualified firms, when he developed a model which provide information on the likelihood of a company's receiving a qualification given its financial and firm litigation data. a OCF is operating cash flows (scaled by lagged total assets) estimated according to the standard set by the Hellenic Capital Market Commission as it is described in decision No.…”

Audit opinion and earnings management: Evidence from Greece

“…During the last three decades, Greece has been an unqualified opinion and 1 for a qualified opinion, irrespective of the qualification type, we measure audit opinions in a more disaggregated fashion. 3 See for example Caramanis and Spathis (2006), Kirkos, Spathis, Nanopoulos, and Manolopoulos (2007), Koumanakos, Georgopoulos, and Siriopoulos (2008), Spathis (2003), Spathis, Doumpos, and Zopounidis (2002) and Spathis, Doumpos, and Zopounidis (2003).…”

“…Second, the impact of TLE cannot be predicted for non going-concern opinions. On the one hand, higher levels of debt may increase the probability of falsified financial statements, resulting in the issue of a qualified opinion (Spathis, 2003). On the other hand, high values of this variable may indicate that a low value of total assets and a high value of total liabilities is correctly stated, thereby decreasing the likelihood of qualifications (Ireland, 2003).…”

Integrating corporate governance and financial variables for the identification of qualified audit opinions with neural networks

“…Since the 1980s, previous studies have applied several different methodologies in the search of models with better predictions. In this line of research, has been applied discriminant analysis [48,52], probit analysis [19,47] and logistic regression [11,39,50,62]. Other, more recent studies have used multicriteria decision techniques [54,61], neural networks (NN) [25,26,30,46,57], support vector machines [20] and decision trees [40].…”

“…In this paper, they used a sample of 173 companies, and took 9 financial variables as explanatory variables. Spathis [62] used a group of 100 Greek companies and used methodologies such as discriminant analysis, logistic regression and multicriteria decision aid method (UTADIS-utilities additives discriminates). They chose a set of 20 variables, composed of financial ratios and non-financial variables.…”