An investigation of independent audit opinions and subsequent independent auditor litigation of publicly-traded failed savings and loans

Abstract

Failures of savings and loans (S & Ls) have resulted in substantial independent auditor litigation; however, there is limited empirical evidence concerning audit opinions of failed S & Ls. Our study investigates the audit opinions of publicly-traded S & Ls that subsequently failed. We found that the independent auditors of failed S & Ls issued qualified (or modified) going-concern opinions or going-concern disclaimers of opinion on the last audited financial statement prior to failure in 19 of 24 cases. Results of univariate and multivariate analyses are consistent with several predictions concerning economic factors expected to influence the type of audit opinion, and our evidence suggests that auditors rendered going-concern reports to those S & Ls that were most likely to fail ex ante. Analysis of independent auditor litigation data reveals that auditor lawsuits related to these failed S & Ls were filed in seven cases. Five of these seven lawsuits implicated auditors who rendered going-concern reports. This suggests that going-concern reports in the year prior to the failure of an S & L do not prevent auditor litigation. Because it is possible that independent auditors will face situations comparable to the S & L crisis in the future, government regulators and the public accounting profession should be interested in research that enhances the understanding of the audit opinion formulation process in such settings.