Do the auditors bear the consequences of corporate failures? The case of failed New Zealand finance companies

This paper examines whether auditors bear any negative consequence of the failures of finance companies in New Zealand. More than 60 finance companies failed since 2006 and these failures imposed massive financial loss on the investors. There is a wide perception of audit failure in the case of these failed finance companies. Therefore, it is important to examine whether there is evidence of poor audit quality in the case of failed finance companies. It is also important to investigate, from the perspective of audit theory and public policy, whether the auditors of these failed finance companies were punished after the failures. The study examines two consequences for the auditors – disciplinary actions against the auditors by Chartered Accountants Australia and New Zealand and client loss. The paper also examines whether the auditor has been sued after the failure of any finance company. The sample is comprised of 37 failed finance companies for which annual reports were available on the website of Companies Office New Zealand. The study finds that auditors who gave unmodified audit opinions are not more likely to face disciplinary actions than those who gave unmodified audit opinions with going concern explanation paragraphs and modified audit opinions. Furthermore, the study utilizes auditor turnover of public listed companies in New Zealand to test another consequence of finance company failures for the auditors – client loss. While there is no significant relationship between disciplinary actions and auditor turnover, a statistically significant relationship is observed between finance company failure and auditor turnover. The study also analyses litigation effect on auditors who involved with finance company failures. Under the primary liability rule – joint and several liability – in New Zealand, auditor is held liable for the loss of the client. The results of this study will be of interest to practitioners, standard setters and law makers, and will fill the literature gap on the impacts of corporate failures on auditors