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

Posted: 6 Oct 2003

See all articles by Marty Butler

Marty Butler

AlixPartners LLP

Andrew J. Leone

University of Miami

Michael Willenborg

University of Connecticut - Department of Accounting

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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 analysis, we re-examine 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.

Keywords: abnormal accruals, audit firms, audit opinions, earnings management

JEL Classification: M41, M43, M49, D21, C81

Suggested Citation

Butler, Marty B. and Leone, Andrew J. and Willenborg, Michael, An Empirical Analysis of Auditor Reporting and its Association with Abnormal Accruals. Journal of Accounting and Economics, Vol. 37, No. 2, pp. 139-165, June 2004. Available at SSRN: https://ssrn.com/abstract=439005

Marty B. Butler

AlixPartners LLP ( email )

2101 Cedar Springs Rd, Ste 1100
Dallas, TX 75201
United States
214-810-6622 (Phone)

Andrew J. Leone (Contact Author)

University of Miami ( email )

School of Business
Coral Gables, FL 33146
United States
305-284-3101 (Phone)

HOME PAGE: http://sbaleone.bus.miami.edu

Michael Willenborg

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269
United States
860-486-3020 (Phone)
860-486-4838 (Fax)

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