The Effect of Tenure, Specialization, Conservatism, and Fees on the Relationship between Going-Concern Opinions and Client Bankruptcy

This paper uses the relationship between a going-concern modified audit opinion and client bankruptcy as an audit quality indicator to investigate factors that could affect audit quality. The setting is important because while stakeholders often view bankruptcies without a preceding going-concern opinion as evidence of impaired auditor independence, there could be various reasons behind them. Using a matched sample of bankrupt and non-bankrupt clients, this paper finds that the relationship is less positive when auditors are non-specialists, allow more income-increasing discretionary accruals, or receive higher audit fees. These results suggest that auditors provide lower audit quality when they lack sufficient industry knowledge, are less conservative, or are more reliant on audit fees