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Qualified audit reports in Finland: evidence from large companies

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  • Erkki Laitinen
  • Teija Laitinen

Abstract

The purpose of the study is to develop a logistic model based on financial statement information to identify qualified audit reports. The empirical data are retrieved from audit reports from thirty-seven publicly-traded companies (HeSE) in the years 1992, 1993 and 1994. Thus, there are in all 111 audit reports of which only eight are qualified in the way of including remarks or supplementary information. These eight qualifications concerned three companies during the period of study. The qualification decision (0/1) is explained by sixteen financial ratios and by the audit lag. Univariate analysis showed that the qualification of an audit report is mainly associated with low profitability, high indebtedness and low (negative) growth. The multivariate logistic model showed that the likelihood of receiving a qualification is larger, the lower the growth of the firm, the lower the share of equity in balance sheet and the smaller the number of employees. The total error rate of the model in Lachenbruch validation was only 5.4%. When two qualified reports containing remarks on an additional and a separate auditor were considered as non-qualified, the corresponding total error rate for a re-estimated logistic model was as low as 1.8%. This model also included the audit lag as an explanatory variable. The results of the study indicate that an efficient model to explain qualifications in the audit reports of Finnish publicly-traded companies can be found.

Suggested Citation

  • Erkki Laitinen & Teija Laitinen, 1998. "Qualified audit reports in Finland: evidence from large companies," European Accounting Review, Taylor & Francis Journals, vol. 7(4), pages 639-653.
  • Handle: RePEc:taf:euract:v:7:y:1998:i:4:p:639-653
    DOI: 10.1080/096381898336231
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    References listed on IDEAS

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    1. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    2. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
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    1. Pinto, Inês & Morais, Ana Isabel & Quick, Reiner, 2020. "The impact of the precision of accounting standards on the expanded auditor’s report in the European Union," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 40(C).
    2. José Ramón Sánchez-Serrano & David Alaminos & Francisco García-Lagos & Angela M. Callejón-Gil, 2020. "Predicting Audit Opinion in Consolidated Financial Statements with Artificial Neural Networks," Mathematics, MDPI, vol. 8(8), pages 1-14, August.
    3. Andriosopoulos, Dimitrios & Gaganis, Chrysovalantis & Pasiouras, Fotios & Zopounidis, Constantin, 2012. "An application of multicriteria decision aid models in the prediction of open market share repurchases," Omega, Elsevier, vol. 40(6), pages 882-890.
    4. Chrysovalantis Gaganis & Fotios Pasiouras & Charalambos Spathis & Constantin Zopounidis, 2007. "A comparison of nearest neighbours, discriminant and logit models for auditing decisions," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 15(1‐2), pages 23-40, January.
    5. Pasiouras, Fotios & Gaganis, Chrysovalantis & Zopounidis, Constantin, 2007. "Multicriteria decision support methodologies for auditing decisions: The case of qualified audit reports in the UK," European Journal of Operational Research, Elsevier, vol. 180(3), pages 1317-1330, August.
    6. Santiago Lago-Peñas & Mercedes Mareque Álvarez-Santullano & Elena Rivo-López & Mónica Villanueva-Villar, 2017. "Determining factors for audit opinion in private family and non-family firms. Evidence from Spain," Working Papers. Collection C: Family business 1701, Universidade de Vigo, GEN - Governance and Economics research Network.
    7. Michael Doumpos & Chrysovalantis Gaganis & Fotios Pasiouras, 2005. "Explaining qualifications in audit reports using a support vector machine methodology," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 13(4), pages 197-215, December.
    8. Garcia-Blandon, Josep & Argiles, Josep Ma, 2015. "Audit firm tenure and independence: A comprehensive investigation of audit qualifications in Spain," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 24(C), pages 82-93.
    9. Mercedes Mareque & Elena Rivo-López & Mónica Villanueva-Villar & Santiago Lago-Peñas, 2019. "Audit Opinions: Are They Really Different for Family Businesses?," SAGE Open, , vol. 9(2), pages 21582440198, June.
    10. Spathis, Charalambos & Doumpos, Michael & Zopounidis, Constantin, 2003. "Using client performance measures to identify pre-engagement factors associated with qualified audit reports in Greece," The International Journal of Accounting, Elsevier, vol. 38(3), pages 267-284.
    11. Chrysovalantis Gaganis, 2009. "Classification techniques for the identification of falsified financial statements: a comparative analysis," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 16(3), pages 207-229, July.
    12. Srbinoska Dusica Stevcevska & Srbinoski Igor, 2021. "A study on audit report timeliness: The Macedonian Stock Exchange," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 57(3), pages 234-254, September.
    13. Musa Success Jibrin & Success Ejura Blessing & Iyaji Danjuma, 2014. "The Role of Auditors in the Recent Nigerian Banking Crisis," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 4(3), pages 231-251, March.
    14. Arber H. Hoti & Hysen Ismajli & Skender Ahmeti & Arben Dermaku, 2012. "Effects of Audit Opinion on Stock Prices: The case of Croatia and Slovenia," EuroEconomica, Danubius University of Galati, issue 2(31), pages 75-87, May.

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