The Likelihood of Modified Audit Opinions : What factors may influence it?

When auditors detect irregularities within a company, the audit opinion issued that year should be modified. This may be inconvenient for the client who might try to influence the auditor not to issue a modification, thereby compromising auditor independence and thus audit quality. The purpose of this paper is to examine how the four factors audit firm, audit fee, client size, and client financial risk affect the likelihood of auditors issuing a modified audit opinion. Data were gathered from 850 Swedish limited companies of which 425 had received a modified audit opinion. Statistical tests, including logistic regressions, show that client size has a negative relationship with modified audit opinions and some indications are found of differences between the audit firms. The level of audit fee shows no relationship while client financial risk shows a negative relationship with the modification concerning depletion of the shareholders’ equity. The findings imply that larger clients may possess the ability to unduly affect auditors, but auditor independence and audit quality seem to be uniform among the Swedish audit firms and the shareholders’ interests largely protected. Based on the differences found between modifications, future research could benefit from examining additional factors on separate modifications