An empirical analysis of auditor reporting and its association with abnormal accruals

In this paper, we use a web-based sampling methodology to obtain and content analyze a large sample of modified audit opinions. Based on this analysis, we re-examine whether certain modified audit opinions are associated with abnormal accruals. We find that the documented relation between modified opinions and abnormal accruals rests with companies that have going-concern opinions. These firms have large negative accruals that are likely due to severe financial distress. Overall, we find no evidence to support inferences in previous research that firms receiving modified audit opinions manage earnings more than those receiving clean opinions. (C) 2003 Elsevier B.V. All rights reserved.