Foreign Ownership and the Auditor's Opinion: An Analysis in Private Subsidiaries

61 Pages Posted: 13 Feb 2018

See all articles by Belen Gill-de-Albornoz

Belen Gill-de-Albornoz

Jaume I University - Department of Finance and Accounting

Simona Rusanescu

University of Groningen - Faculty of Economics and Business, Department of Accounting and Auditing

Date Written: February 1, 2018

Abstract

In a large sample of private Spanish subsidiaries, we observe a significantly greater incidence of modified audit reports in foreign than in local group subsidiaries. Results are consistent with foreign group subsidiaries having lower incentives to avoid receiving modified audit opinions (MAOs) because of their lower dependence on external financing. Additionally, our tests reveal that, of the two types of MAOs that are potentially avoidable, only opacity related MAOs are significantly more frequent in foreign than in local group subsidiaries. Curiously, despite that the literature documents a higher incidence of earnings management in foreign-owned private subsidiaries, the evidence of higher frequency of GAAP violation related MAOs in foreign group subsidiaries is weak. Our findings indicate that foreign shareholders do not improve financial reporting quality in the private setting, but are associated with more opaque companies where the auditors are prevented from doing their work. Additionally, results suggest that the cost-benefit relation of avoiding MAOs hinges on the underlying reason for modification.

Keywords: audit opinion, financial reporting quality, foreign ownership, private companies, subsidiaries

JEL Classification: F23, M41, M48

Suggested Citation

Gill de Albornoz Noguer, Belen and Rusanescu, Simona, Foreign Ownership and the Auditor's Opinion: An Analysis in Private Subsidiaries (February 1, 2018). Available at SSRN: https://ssrn.com/abstract=3116125 or http://dx.doi.org/10.2139/ssrn.3116125

Belen Gill de Albornoz Noguer

Jaume I University - Department of Finance and Accounting ( email )

Campus del Riu Sec
12081 Castello de la Plana
Spain

HOME PAGE: http://www.uji.es

Simona Rusanescu (Contact Author)

University of Groningen - Faculty of Economics and Business, Department of Accounting and Auditing ( email )

Nettelbosje 2
Groningen, Groningen 9747 AE
Netherlands

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