An Empirical Analysis of Auditor Reporting and Its Association with Abnormal Accruals

An Empirical Analysis of Auditor Reporting and Its Association with Abnormal Accruals
Author(s): Butler, Marty
Year: 2003
Paper Number: GBS-ACC-2003-008
Goizueta Department: Accounting

Abstract

In this paper, we introduce a Web-based sampling methodology that we use to obtain and content analyze a large sample of modified audit opinions. Based on this, we then reexamine whether certain modified audit opinions are associated with abnormal accruals, as a proxy for earnings management. We find that the documented relation between modified opinions and abnormal accruals rests with companies that have going-concern opinions because such companies have extremely negative accruals. The explanation for these negative accruals is likely severe financial distress since we find that, ceteris paribus, their magnitude is not significantly different from that of a sample of similarly-distressed control firms. Overall, we find no evidence to support inferences in previous research that firms receiving modified audit opinions manage earnings more than those receiving clean audit opinions.