Credit ratings and audit opinion: evidence from Tunisia

Abstract

Purpose The purpose of this paper is to examine whether credit ratings issued by Fitch predict auditor’s opinion for the Tunisian financial companies. It studies the association between Fitch’s credit rating and the audit opinion. Design/methodology/approach The whole population was analyzed. It is composed of 35 banks, leasing companies and factoring companies in Tunisia. The hand-collected data over 11 years (2005–2015) were used and a multiple-ordered logistic regression was performed. Findings The findings show that firms with a high short-term grade, a high long-term grade or a positive outlook are more likely to receive an unqualified audit opinion. In addition, companies with a stable outlook are more likely to receive an explanatory paragraph, a qualification or a going-concern opinion. Originality/value Studies examining the relationship between credit ratings and audit opinion are rare. This piece of research adds to knowledge about the relationship between different components of agency ratings and the auditor’s opinion in a developing country. Previous studies have investigated the case of developed countries and have been interested in the only impact of the long-term credit rating. This study analyzes three components of credit rating, namely long-term credit rating, short-term credit rating and rating outlook. In addition, it sheds light on the effect of various rating grades issued by rating agencies on the audit opinion. It gives a broader view of the relationship between credit ratings and audit opinion.

The associations of board of directors’ characteristics with modified audit opinion

“…Hence, these variables are included as control because this is uncovered to exert a significant influence on modified audit opinion. In this study, with regard to the audit firm size and the operating cash flow it is expected to have a negative association with a modified audit opinion (Pucheta-Martínez & de Fuentes, 2007;Firth, et al, 2007;Goh, 2009;Farinha & Viana, 2009;Rahmat et al, 2009;Kaplan & Williams, 2013;Tsipouridou & Spathis, 2014;Moalla & Baili 2019). In respect to the audit report lag (AUDLAG), the losses (LOSS), and the statutory external audit fees (EAF) are expected to have a positive relationship, with a modified audit opinion (Francis, 1984;Chen & Church, 1992;Bell et al, 2001;Behn et al, 2001;DeFond et al, 2002;Geiger & Rama, 2003;Pucheta-Martínez & de Fuentes, 2007;Firth et al, 2007;Johl et al, 2007;Basioudis et al, 2008;Farinha & Viana, 2009;Malek & Che Ahmad, 2011;Johl et al, 2012;Kaplan & Williams, 2013;Tsipouridou & Spathis, 2014;Moalla, 2017;Sultanoglu et al2018;Alkilani et al, 2019a;Alkilani et al, 2019b;Moalla and Baili 2019).…”

“…In this study, with regard to the audit firm size and the operating cash flow it is expected to have a negative association with a modified audit opinion (Pucheta-Martínez & de Fuentes, 2007;Firth, et al, 2007;Goh, 2009;Farinha & Viana, 2009;Rahmat et al, 2009;Kaplan & Williams, 2013;Tsipouridou & Spathis, 2014;Moalla & Baili 2019). In respect to the audit report lag (AUDLAG), the losses (LOSS), and the statutory external audit fees (EAF) are expected to have a positive relationship, with a modified audit opinion (Francis, 1984;Chen & Church, 1992;Bell et al, 2001;Behn et al, 2001;DeFond et al, 2002;Geiger & Rama, 2003;Pucheta-Martínez & de Fuentes, 2007;Firth et al, 2007;Johl et al, 2007;Basioudis et al, 2008;Farinha & Viana, 2009;Malek & Che Ahmad, 2011;Johl et al, 2012;Kaplan & Williams, 2013;Tsipouridou & Spathis, 2014;Moalla, 2017;Sultanoglu et al2018;Alkilani et al, 2019a;Alkilani et al, 2019b;Moalla and Baili 2019). Therefore, the companies are expected to be received an unmodified audit opinion when the companies have high quality auditors, shorter audit report lag, strong financial health, appropriate net cash flow generated from operating activities, and suitable audit services fee paid by the company to its statutory external auditor on audit engagement.…”

Predicting auditors' opinions using financial ratios and non-financial metrics: evidence from Iran

“…To measure more precisely the relationship between financial and non-financial variables with the type of audit opinion, we control a set of potential variables employed in previous studies (e.g. Altman, 1968;Beaver, 1966;Dopuch et al, 1987;Bell and Tabor, 1991;Carson et al, 2012;Chen and Church, 1992;Spathis, 2003;Ghale Rudkhani and Jabbari, 2014;Moalla, 2017;Moalla and Baili, 2019;Maldonado et al, 2019). Therefore, we apply eight control variables, namely quick ratio, inventory turnover ratio, fixed assets turnover ratio, total asset turnover ratio, return on total assets, return on equity, the ratio of net income to sales and the ratio of market value to book equity.…”

“…It is notable that more prior studies acknowledge that auditing risks are higher in emerging economies, and thus considering firm failures and audit opinions is particularly vital in developing countries. Thereby, a significant body of academic literature has typically emerged on financial failure and audit opinion in markets (Gande et al, 2008;Moalla and Baili, 2019;Karabag, 2019). For instance, Francis et al (2002) present evidence that there is a more significant probability of financial failure in emerging markets.…”

Gender, Perception of Audits, Access to Finance, and Self-Assessed Corporate Tax Compliance

“…This study helps address gaps in earlier research in four ways. First, the following steps can be taken to increase the knowledge of the benefits of financial statement audits in businesses that are more focused on economic gains (Moalla and Baili 2019;Orazalin and Akhmetzhanov 2019;Bacha et al 2021): (1) maintaining compliance, (2) more accurate reports, (3) accuracy of determination in profit, (4) simplification of the loan process, (5) detection of cheating, (6) business growth enhancement, and (7) assistance with planning and budgeting. Second, access to finance is used as a moderating factor between financial statement audits and voluntary tax compliance.…”