Do Audit Opinions Affect Earnings Persistence?

Abstract

In the professional literature, the largest number of studies focus on examining and analyzing the content of auditors’ reports and their impact on the quality of financial statements, while a smaller number of authors examine the impact of audit opinions on earnings persistence. Since understanding the type of audit opinion undoubtedly allows investors to assess the quality of a company’s earnings and predict future cash flows, this paper investigates whether they react differently when making capital in- vestment decisions if the financial statements contain a modified opinion. By looking at the previous literature, the authors consider market reactions, especially when it comes to some kind of modified opinion, given that they can cause a negative reaction and affect the reduction of earnings persistence. The research results so far show, although inconsistent and unusual, still interesting results when it comes to the impact of the audit opinion on earnings persistence. By analyzing previous studies, the authors reveal whether investors give enough importance to the audit opinion when making financial and investment decisions, which could later affect the amount of additional capital, which is a necessary condition for development, especially in transition and developing countries. In addition to the conclusions of this paper being relevant for users of financial statements, especially investors, they are also significant for regulatory bodies, as they indicate the necessity of constant improvement of the accounting and auditing system.