حسابرسی خارجی و پیش بینی ورشکستگی External audit and bankruptcy prediction

1 Introduction This paper investigates the relationship between external auditor characteristics and the likelihood of bankruptcy. We supplement Ohlson’s (1980) logit model for bankruptcy prediction with auditor attributes to test whether the latter are associated with default and whether the inclusion of such attributes improves the model’s predictive ability. There are several reasons for further research about external audit and bankruptcy prediction. Research has, thus far, paid little attention to the question whether external auditing helps to predict bankruptcy. Certain studies have investigated the relationships between qualifed audit reports and fnancial failure, but have delivered conficting results. Hopwood et  al. (1989) found that bankrupt companies receive a qualifed going concern opinion in the year before the default, while Lennox (1999) found that audit reports are not accurate indicators of fnancial failure. This stream of research only focused on qualifed going concern opinions, whereas other auditor attributes can be associated with bankruptcy, especially in the years preceding the bankruptcy and the issuing of a qualifed going concern opinion. Such attributes can include fees, size, tenure and industry expertise. The bankruptcy setting is particularly salient for analyses concerning auditors’ activities, given the high probability of reputational risk and litigation costs that auditors can incur when reviewing insolvent or fnancially distressed companies (Robinson 2008; Blay and Geiger 2013). Another reason for further research on this topic arises from the bankruptcy prediction literature. Standard, accounting-based bankruptcy prediction models only use fnancial ratios and studies have found that their predictive ability has dwindled in the last decades (Beaver et  al. 2005, 2012). Hence, researchers argue for additional explanatory variables to be included in the models (Agarwal and Tafer 2008; Beaver et al. 2012). The decline in predictive power is attributed to factors such as the perception of investors and lenders that there is an increase in managerial discretion in fair value accounting environments (such as the US GAAP and the IAS/ IFRS) (Beaver et al. 2012). An efective external audit can assure external users in an appropriate way that the fnancial statements are reliable and that they accurately represent the frm’s performance and fnancial position (Bratten et al. 2013). We analyse a sample of U.S. frms for the period 1992–2014. We supplement Ohlson’s (1980) logit model for bankruptcy prediction with auditors characteristics. The model includes the most common fnancial ratios, which were applied in prior bankruptcy literature (Bellovary et al. 2007; Altman et al. 2015). We complement the model with the following auditor attributes: fees, size, tenure and industry expertise. To the best of our knowledge, no prior research has yet tried to supplement a standard bankruptcy prediction model with audit data to test for possible associations, as well as an increase in predictive ability. We also analyse our model’s accuracy by using a table classifcation approach and a receiver operating characteristic (ROC) curve to assess whether auditor attributes improve the predictive ability of Ohlson’s (1980) model. As a robustness check, we also control for Altman’s (1968) Z-Score.