Tests of the incremental explanatory power of auditor qualified opinion and audit firm changes in predicting impending bankruptcy

This paper investigates the incremental explanatory power of auditor-qualified opinions and auditor changes in log-linear logistic regression prediction of impending bankruptcy. We find that auditor-qualified opinions and auditor changes, both individually and jointly, provide incremental explanatory power beyond that conveyed by traditional financial ratios in predicting impending bankruptcy. The result of this study supports our prior expectations that failing firms are leaning toward changing auditors more than do healthier firms. Our findings offer compelling evidence that auditor changes provide incremental explanatory power in predicting impending firm failure beyond what is conveyed by joint consideration of auditor-qualified opinions and traditional financial statement ratios.