Abstract

The issue of auditors impairing their independence when providing non-audit services (NAS) to audit clients continues to be subject of global regulatory concern. However, the profession has long argued that knowledge gained from providing NAS can spill over to other areas and can serve to improve audit quality. Accordingly, we revisit the effect that NAS have on the likelihood of an auditor issuing a going concern modified opinion (GCMO) to distressed clients, as well as the accuracy of those opinions. We also examine whether industry specialization is associated with GCMO decisions and their accuracy. Our analysis of Australian company audits finds a significant negative association between auditors rendering a GCMO and the magnitude of NAS fees, and that increasing NAS fees are associated with fewer GCMO-related reporting misclassifications. Our analyses also find no strong evidence of an industry specialist auditor effect on GCMO reporting or report accuracy. In sum, our analysis of audit reporting decisions in Australia supports the concerns of regulators regarding reduced GCMOs when NAS fees increase, and also supports the contention of the accounting profession that providing NAS improves the quality of audit decision-making, leading to improved accuracy of GCMO reporting decisions.

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