Audit Opinion and Earnings Management: The Case of Covid

This study investigates auditors' reporting behavior during a period characterized by aggressive earnings management and a radical change in the auditors' operating environment. Precisely, we examine the audit opinion and earnings management (proxied by discretionary accruals) relationship during the COVID-19 pandemic period, for a sample of non-financial firms in Europe. For an in-depth analysis, the authors segregate the audit opinion qualifications into two categories: qualifications for going-concern uncertainty and those for non-going-concern reasons. The results demonstrate that more often than not, audit qualifications are not related to the levels of earnings management in Europe. However, during the pandemic, the likelihood of auditors issuing a qualified audit opinion for going-concern uncertainties is associated with earnings management. We observe that this change in auditors' reporting behavior for going-concern issues ceases after the pandemic period. Additionally, the likelihood of auditors issuing a non-going concern audit qualification is not related to earnings management but is largely driven by the type of audit opinion issued in the preceding year. Finally, the results indicate that in Europe, most audit qualifications are not going-concern-related, and the BIG4 auditors qualify less. Overall, the findings are relevant to investors and financial statement users as prior studies have linked auditor reporting decisions to investor behavior.