The Content of the Audit Report in the Year Prior to Bankruptcy Filing. Empirical Evidence from Spain

Spanish Journal of Finance and Accounting, (Forthcoming)

50 Pages Posted: 26 Oct 2016

See all articles by Nora Muñoz-Izquierdo

Nora Muñoz-Izquierdo

Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF)

Maria‐del‐Mar Camacho‐Miñano

Universidad Complutense de Madrid (UCM) - Faculty of Economics and Business Administration

David Pascual‐Ezama

Universidad Complutense de Madrid (UCM)

Date Written: October 4, 2016

Abstract

This paper analyses empirically the content of the audit report of financially distressed firms in the year prior to bankruptcy filing, with a double purpose: to propose a classification of the content of audit reports and to examine the differences on the document depending on several features of the auditor and the audited firm. Using a sample of Spanish financially distressed companies from 2004 to 2014, results show that 13% are clean reports or reports that do not contain any disclosures, and qualifications are more frequent than matter paragraphs. 23% of paragraphs inform about filing for insolvency legal proceedings and 45% are related to going concern uncertainties. Additionally, there is evidence of significant differences in the content of the audit report depending on auditor size, industry and financial condition of the audited firm, the quarter on which the court order is imposed and the resolution of the bankruptcy procedure, whereas comments are independent from a change in auditor. Our evidence suggests the usefulness of the audit report in predicting financial distress risk, and this usefulness will be incremented due to the implementation of the new Audit Law in Spain, as it requires mentioning any financial risks when going concern uncertainties may exist.

Keywords: bankruptcy filing, audit report, emphasis of matter paragraphs, qualifications, going concern

JEL Classification: G33, M42

Suggested Citation

Muñoz-Izquierdo, Nora and Camacho-Miñano, María-del-Mar and Pascual‐Ezama, David, The Content of the Audit Report in the Year Prior to Bankruptcy Filing. Empirical Evidence from Spain (October 4, 2016). Spanish Journal of Finance and Accounting, (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2858851

Nora Muñoz-Izquierdo (Contact Author)

Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF) ( email )

Leonardo Prieto Castro 2
Madrid, Madrid 28040
Spain
+34650961908 (Phone)

María-del-Mar Camacho-Miñano

Universidad Complutense de Madrid (UCM) - Faculty of Economics and Business Administration ( email )

School of Business Administration
Somosaguas Campus
Madrid, Madrid 28223
Spain

David Pascual‐Ezama

Universidad Complutense de Madrid (UCM) ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain

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