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Does auditor gender affect issuing a going-concern opinion?

Sarowar Hossain
School of Accounting,
Australian School of Business,
University of New South Wales
NSW 2052, Australia
Tel: +612 9385 6352
Fax: +612 9385 5925
E-mail: s.hossain@unsw.edu.au

Larelle (Ellie) Chapple


School of Accounting and Business Information Systems,
Australian National University,
Canberra, 0200, Australia
Tel: +612 6125 6755
Fax: +612 6125 5005
E-mail: Larelle.Chapple@anu.edu.au

Draft: 11th January 2012


This version prepared for submission to American Accounting Association Annual Meeting
August 2012

Electronic copy available at: http://ssrn.com/abstract=2094200

Does auditor gender affect issuing a going-concern opinion?


Abstract
Prior experimental research has documented a potential impact of auditor gender on audit
judgement, auditor behaviour and decision making. Using a unique data set of 10 286 firmyear observations of auditor gender, this study examines whether a particular characteristic of
the auditor- the auditors gender - affects audit quality. Audit quality is measured by the
propensity to issue modified opinions, first-time going-concern opinions, and going-concern
opinions for financially distressed companies. The results show that the female auditors are
less likely to issue modified opinions, first-time going-concern opinions, and going-concern
opinions for financially distressed companies. Consistent wit prior literature, this study also
confirms that modified opinions, first-time going-concern opinions, and going-concern
opinions for financially distressed companies are consistently negatively associated with the
size of the client firm, and positively associated with the prior year audit opinion and
whether the company reported a loss.

The findings provide evidence of differential audit

outcomes when auditor is a female. The finding of this study has potential practical
implications for accounting firms and professions in terms of assignment of personnel to
audit engagements, training, decision aids, and the audit review process. The results are
robust in various sensitivity analyses.
Key words: auditor gender, audit quality, auditor behaviour, audit opinion, going-concern,
distressed firms.
JEL: M42

Acknowledgements: We gratefully acknowledge the comments received from Gary Monroe


and data provided by Jenny Lee. We also thank Kris Hardies for his ongoing support and
interest in this project.
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Electronic copy available at: http://ssrn.com/abstract=2094200

Does auditor gender affect issuing a going-concern opinion?


INTRODUCTION
This study assesses the influence of auditor gender on audit opinion, specifically the goingconcern opinion. Prior experimental research has documented the potential impact of auditor
gender on audit judgment (e.g., Chung and Monroe 2001; Gold et al. 2009; Hardies et al.
2012). Further, researchers have started investigating the auditor gender effect on audit
quality (e.g., Ittonen et al. 2009; Hardies et al. 2010a; Hardies et al. 2010b). Since audit
quality is unobservable, the audit opinion, as an observable outcome of the audit report, is a
compelling proxy for audit quality (e.g., Geiger and Raghunandan 2002; Knechel and
Vantraelen 2007). Consistent with prior studies (e.g., Carey and Simnett 2006; Chin and Chi
2008; Chen et al. 2010; Chi et al. 2010; Hardies et al. 2010a), the current study primarily
measures audit quality as the propensity to issue a going-concern opinion for financially
distressed firms. We also recognise modified opinion and first-time going-concern opinion
are used as additional measures of audit quality.

The audit process is affected by the characteristics of the specific auditor who performs the
audit tasks (Church et al. 2008). In the annual report, the auditor is required to form an
opinion as to whether financial statements and presented fairly. To form the opinion, auditor
judges the complexity between the various account balances, the size of the balance, and the
number of cues contained in the data set including the consistency of these cues (Chung and
Monroe 2001). In these types of complex decision tasks, females may be more efficient and
effective than males because of females superior ability to differentiate between and
integrate decision cues (Chung and Monroe, 2001). The audit engagement partner plans and
implements the engagement and ultimately determines the type of audit report to be issued to
the client (Chin and Chi 2009; Hardies et al. 2010a). An audit partner may less likely to issue

Electronic copy available at: http://ssrn.com/abstract=2094200

a modified opinion avoiding disputes with a client, so as to avoid loss of the client,
particularly in a constrained environment (Hardies et al. 2010a). Thus, it is an important issue
to investigate whether a particularly observable characteristic of the auditor - the gender of
audit partners - influence the types of audit opinion issued to the audit clients. Accordingly,
we investigate two specific research questions. First, whether any systematic difference
between the auditor gender and the audit clients that the male and female audit partners
audits? Second, what effect does auditor gender have on the propensity to issue a goingconcern opinion for financially distressed companies in a capital market setting?

This study is motivated by the wider regulatory debate regarding auditor independence. The
last ten years has seen progressive regulatory intrusion to curb perceived auditor
independence conflicts by prescriptions and mandates, such as mandatory rotation,
proscribing non audit services, global professional and ethical standards, regulating auditor
behaviour and relationships. It is not clear the extent to which the profession itself was
broken and to what extent these laws will enhance auditor independence and audit quality
(DeFond and Francis 2005). These changes affect the audit profession at the fundamental
level of recruitment, training, retention and career progression. For example, the data relied
on herein show that, at the most, female auditors have ten percent of capital market audit
engagements. So we are not asserting that there is a problem per se with modified audit
opinion use or frequency, nor with female auditors. Rather, in posing the two questions, this
study adds to the growing body of literature examining the impact of auditor specific
characteristics on audit engagements and provides evidence that may prove useful to the
sustainability of the audit profession.

There is limited research on auditor gender due to data availability, although the individual
characteristics of audit engagement partner has the potential to significantly influence a
companys external financial reporting and audit quality (Church et al. 2008; Hardies et al.
2010a). Australia is a unique environment for empirical research on audit partner gender and
audit quality in a capital market setting because longitudinal data identifying the signing audit
partner(s) is available.1 So far we know there are two unpublished empirical studies (Chin
and Chi 2008 and Hardies et al. 2010a) that investigate the associations between auditor
gender and modified opinions. Our study is different from those two studies and important
for several reasons.

First, Chin and Chi (2008) hypothesised and explained their results based upon psychological
research on sex differences. Hardies et al. (2010a, 3) argue that this methodology is highly
flawed. Chin and Chi (2008) use the environment where legislation requires joint-audits and
two audit partners have to sign the audit report. The current study uses listed companies and
where only the lead audit partner has to sign the audit report. An audit partner may have more
risk and responsibility where the audit partner can be identified and only one person sign the
report because audit engagement partner ultimately determine the type of audit opinion to be
issued to the client (Chin and Chi 2008; Hardies et al. 2010a). An audit partner is ultimately
responsible for administering and making audit decisions (Chen et al. 2010). The signing
audit partners have their personal reputation at stake and also consider their private benefits
(such as job security, promotion opportunity etc.) when making audit decisions.

Second, Hardies et al. (2010a) use private companies in their study, which may have less
scrutiny from the users than listed companies and their financial reporting may be of lower

1
We thank Kris Hardies for pointing out that audit partner sign off is now in the EU since 2010: European
Directive 2006/43/EC.
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quality (e.g., Chaney et al. 2004; Ball and Shivakimar 2008) since they do not have a broad
shareholder base to which they are accountable (Knechel and Vantraelen 2007; Hardies et al.
2010a). This operates as a more constrained environment to observe modified opinions. The
current study uses listed companies, which are more accountable to the stakeholders and face
more scrutiny than private companies. The findings of this study will have a more immediate
impact on capital market regulation than the private companies.

Finally, prior research suggest that audit quality may be mediated or moderated by a variety
of auditors individual characteristics such as age, gender, personality, experience, and
appearance (Church et al. 2008; Hardies et al. 2011). It is also important to investigate
whether the auditors characteristics are correlated or systematically related with audit report
for public companies (Church et al. 2008). Thus, the findings of the current study will be of
interest to a larger group of audience throughout the world for all listed companies where
there are similar environments. The current study empirically examines the influence of
female auditors on audit opinion issued by auditors in an environment where audit partner
rotation is mandatory and signing audit partners names have been disclosing for a long
period of time.

The results show that the female auditors are less likely to issue modified opinion, less likely
to issue first-time going-concern opinions and are also less likely to issues going-concern
opinions for financially distressed companies. This finding provides evidence of differential
audit quality when the auditor is a female but it does not attribute a cause to this finding. For
example, Hardies et al. (2010a) position their finding within a particular constrained context
of private companies, where the familiarity threats to non-appointment are greater. The
findings provide speculation that female auditors avoid risk of replacement not to issue

modified opinions to audit clients. Auditors may lose a client following the issuing a
modified audit opinion since clients do not want to receive any audit report other than a
standard unmodified opinion (Mutchler 1984; Gibbins et al. 2001; Hardies et al. 2010a).

The findings of this study provide differences between audit engagements of male and female
auditors in issuing audit opinions, in a capital markets setting. Traditionally, modified audit
opinions have been used as a proxy for audit quality, so the results suggest whether there is
an audit quality difference between male and female auditors. The results may have important
implications for audit firms in terms of assignment of personnel to audit engagements,
training, decision aids, and the audit review process. The findings provide insights to
professional and academic researchers in the campaign of equal opportunities for male and
female in the work place.

The remaining of the paper is organised as follows: section II provides the extant literature
and development of hypotheses followed by the research methods is in section III. Section IV
reports the results of the study followed by conclusion in section V.

BACKGROUND OF THE STUDY


In the twenty first century, the number of women in the public accounting profession has
increased significantly (Hong Kong Institute of Public Accountants, HKICPA 2008; Law
2010). World Development Report (World Bank 2011) identifies that females now represent
40 percent of the global labour force and more than half the worlds university students.2 In
the US, as reported by Collins (1993), female students represent more than 50 percent of the
new graduates, and majority of the public accounting firms prioritise female retention

2
Australias Sex Discrimination Act 1984 draws on CEDAW to prohibit discrimination in public life on the
basis of sex, marital status, pregnancy, or potential pregnancy.
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(American Institute of Public Accountants, AICPA 2006). In Australia, 55% of graduates


were female during 2007-08 (Australian Bureau of Statistics, ABS 2008). Thus, the career
progression and retention rates of those graduates, particularly female graduates, into auditing
are interesting issues to investigate for the sustainability of the profession.

Prior studies use different theoretical perspectives to explain the behaviour of female and
male in business decision making. According to organizational theory, females are associated
with better organizational outcomes, improve and facilitate tough decision making (Clark
2005; Huse and Solberg 2006; McInerney-Lacombe et al. 2008). In psychology, economic
psychology literature suggests that females are more conservative and risk averse than male
(e.g., Byrnes et al. 1999). Cognitive psychology literature has acknowledged significant
gender-based differences I, for example, information processing, diligence, conservatism, and
risk tolerance. These cogitative functions are relevant in the audit process and auditor
judgement (e.g., Feingold 1994; Powell and Ansic 1997; Byrnes et al. 1999; Costa et al.
2001; Eckel and Grossman 2002; Nettle 2007; Schmitt et al. 2008; Ittonen et al. 2011). In
selectivity theory, women tend to integrate more of the available evidential cues into their
judgements (than men), reflecting an intense level of cognitive processing (Gold et al. 2009,
3). According to signalling theory, appointing a female to a significant corporate leadership
position, such as director, chief executive officer or an audit committee member/chair
delivers a positive message to capital market participants (Huang et al. 2011; Krishnan and
Parson 2011). Does appointing a female lead auditor to the audit engagement provide a
similar signal regarding the audit client?

Prior psychological and auditing literature identifies the behavioural differences between
female and male. In the auditing literature, prior judgement and decision making research

provide evidence of gender affects on auditor judgments (e.g., Chung and Monroe 2001;
ODonnell and Johnson 2001; Gold et al. 2009). Chung and Monroe (2001) find that female
participants are more accurate and effective information processors in complex audit tasks.
ODonnell and Johnson (2001) report that females are less efficient in audit judgements. In
contrast, the results of Chung and Monroe (2001) suggest that audit judgments proposed by
female audit partners may be less accurate than male partners. Gold et al. (2009) find that
female auditors are less influenced by unverified client expectations. In the context of risk,
females are generally more risk averse than male (Hinz et al. 1997; Byrnes et al. 1999; Dwyer
et al. 2002). In information processing, female tends to employ more comprehensive and
detailed cognitive information processing than men (Gold et al. 2009, 3). In ethical issues,
females apply higher ethical standards in their decision making than male (e.g. Ambrose and
Schminke 1999; Ford and Richardson 1994; Thorne et al. 2003).

A few studies examine the affect of auditor gender on audit quality. Using a sample of 371
Finnish and Swedish NASDDAQ/OMX-listed firms, Ittonen et al. (2009a) find that female
audit engagement partners are associated with smaller unexpected accruals. An experimental
study by Breesch and Branson (2009), in which they analyse the final written exams of 20
female and 20 male future auditors, report no significant difference in the severity of the
issued audit opinion by male and female auditors. They noted that female auditors discover
more potential misstatements than male auditors, however, female auditors analyse the
misstatements in a less accurate manner than male auditors. Motivating from psychological
research on sex differences, using a sample of 19 331 listed Taiwanese companies where two
auditors have to sign audit report, Chin and Chi (2008) find evidence that clients have a
higher likelihood of receiving a going-concern modified opinion when booth the leading and
the concurring auditors were female. Using a sample of 14 314 private Belgian companies,

Hardies et al. (2010a) reveal no systematic association between the likelihood that a modified
audit opinion is issued and the sex of the audit engagement partner (although they find female
auditors are more likely to issue a modified opinion when there are high audit fees).

EXTANT LITERATURE AND DEVELOPMENT OF HYPOTHESES


As outlined above, there are a number experimental studies on gender impact in accounting.
However, there is a limited empirical research on the associations between auditor gender and
audit quality due to non-availability of auditors gender information. Although there are few
countries (such Australia, Taiwan, EU countries and China) where the names of signing audit
partners are disclosed in the audit reports, however, the gender of audit partners is not
disclosed.

By analogy, there are a considerable number of empirical research papers on the associations
between female CEOs and firm acquisition (Huang and Kisgen 2009); discretionary accruals
(Baura et al. 2010; Krishnan and Parsons 2008; Peni and Vahaama 2010); and analysts
earnings forecasts (Gul et al. 2011). Research finds that firms with a female chief financial
officer (CFO) are associated with income-decreasing discretionary accruals, lower absolute
value of discretionary accruals, and higher earnings quality suggesting that female CFOs
follow more conservative earnings management strategies (Baura et al. 2010; Krishnan and
Parsons 2008; Peni and Vahaama 2010).

Research on the female representation in the board argues that females on the board3 are less
likely to engage in opportunistic income-increasing earnings management (Srinidhi et al.
2011). Gender of board of directors is also associated with higher quality audit and lower

3
Women have limited presence on boards of directors around the world. Norway 40 percent, Sweden 21%, and
less than 2 percent in Bahrain, Japan, Jordan, the Republic of Korea, Qatar, Saudi Arabia, and the United Arab
Emirates (World Bank 2012).
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earnings management (Srinidhi et al. 2011). Gul et al. (2011) find that analysts earnings
forecast accuracy is higher, analysts forecast dispersion is lower, and analysts forecast range
is narrower when firms include female on the board. Huse and Solberg (2006) find that the
female representation on board improved boards behaviour and effectiveness because female
directors are better prepared for board meeting than their counterpart. Krishnan and Parsons
(2008) find that earnings quality is positively associated with gender diversity in senior
management, which indicates that female are more risk averse than men and are less likely to
engage in unethical behaviour (Huang et al. 2011).

There are few studies examine the associations between the female representation on audit
committee and audit quality. Huang et al. (2011) discuss that female director audit committee
strengthens corporate governance due to perceived female conservative and ethical qualities
and find a significant positive association with cumulative abnormal returns. In the audit
quality research, Ittonen et al. (2009b) find that female representation on the audit committee
reduces the inherent risk of misstatements. Research on risk taking behaviour of women in
investment find that women are more risk averse than men when making investment choices
(Riley and Chow 1992). Women keep their investment accounts for a longer period than men
which results in higher returns (Barber and Odean 2001).

Auditing research on judgements and decisions making has examined which auditor
judgements are biased because of the issue of heuristics (Trotman 1998; Solomon and
Trotman 2003). Female auditors provide more processing effort than male auditors in a low
risk context (ODonnell and Johnson 2001; Gold et al. 2009). Chung and Monroe (1998)
provide evidence that male accounting students are more selective in processing information.
Alternatively, female students used a more comprehensive information processing strategy

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(Chung and Monroe 1998). Female auditor has a risk averse tendency and exhibits less risky
judgements than male auditor (Gold et al. 2009).

An empirical study of Ittonen et al. (2009a) suggests that the behavioural difference between
female and male auditors is an important issue for the financial reporting quality and quality
of auditing. Ittonen et al. (2009a) find a significant behavioural difference between male and
female auditor regarding earnings quality report that female audit engagement partners are
associated with smaller unexpected accruals. An experimental study by Breesch and Branson
(2009), report that there is no difference in the severity of the audit opinion issued by the
female and male auditors. Chin and Chi (2008) find that clients have a higher likelihood of
receiving a going-concern modified opinion when both the leading and the concurring auditor
are female. Hardies et al. (2010a) fail to find systematic association between the likelihood of
issuing a modified opinion and sex of the audit engagement partner. However, they find that
female auditors are more likely to issue modified opinions to companies with high audit fees.

Female auditors may consider not to issue a modified opinion because they are more risk
averse than male auditors. The predominant intuition from the literature that informs this
study, is that female auditors resist a modified audit opinion because this will influence the
clients decision to switch or to retain the incumbent auditor (Ruiz-Babadillo et al. 2006). If
an auditor issues a clean opinion, then the probability of retaining the auditor is high (RuizBabadillo et al. 2006). If there is a disagreement between the auditor and client and this
disagreement result a modified opinion, the client may switch the auditor (Krishnan, 1994;
Krishnan and Stephens 1995; Lennox 2000; Gomez Aguilar and Ruiz-Babadillo 2003; RuizBabadillo et al. 2006). Thus, the study tests the following hypothesis:

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H1: Female auditors are less likely to issue modified opinions than male auditors.

METHODS
Sample
The institutional setting of Australia provides a unique opportunity to examine whether the
audit partners gender influences the audit opinion outcome, since the audit engagement
partner(s) is identifiable from audit reports submitted by companies participating in the
capital market. However, the gender of the audit partners is not disclosed in the audit reports.
Audit partner data is hand-collected directly from audit reports. The sources of annual reports
are AspectHuntley DatAnalsys, Connect4 and companies web sites. We identified auditors
gender based on their full name and other sources.4 Some of the names are ambiguous as to
gender and were unable to identify their gender, these engagements are excluded from the
sample (n = 46 firm-year). We use 8 years of data during 2003-2009 and the initial sample
was 11 158 firm-year observations. The final sample is 10 286 firm-year after excluding the
companies which had double audit partners and did not have audit partners name in the
annual reports, failed to identify the gender and missing data. The sample description is
provided in Table 1 and the industry representation of the sample is in Table 2.
<PLEASE INSERT TABLE 1 AND 2 ABOUT HERE>
Model
Carey and Simnett (2006) test whether there is an association between a particular auditor
characteristic (auditor tenure) and audit quality. They use three common measures of audit
quality, the first being the auditors propensity to issue a going concern opinion for
financially distressed companies. Accordingly, to predict audit opinion, we start with this

4
We acknowledge the contribution of Jenny Lee who helped us to identify the audit partner gender. We also use
other sources such as Google, Who is who in Australia, web sites of the audit firms to identify the audit
partners gender.
13

model, adapting control variables from the prior studies, specifically Chen et al. (2010), Chi
et al. (2010) and including a new variable of interest relating to characteristic, gender
(FEMALE). Therefore, the model in this study controls for more variables that are relevant in
the current environment to predict audit opinion. Further, we replicate the going-concern
model of Carey and Simnett (2006) to test the robustness of the model selection. Carey and
Simnett (12006) specifically positioned the sample period of their study prior to mandatory
rotation laws. Our sample period (2003-2009) straddles the implementation of mandatory
rotation in Australia in 2006. The following models were estimated to test the associations
between the auditor gender and audit quality:

AUDOPINION

0 +1FEMALE +2Prior_OPINION +3CATA +4LEVERAGE


+5Chg_LEVERAGE +6RETURN +7LOSS +8LnAGE +9SIZE
+10LOCAL +11BIG4 +12Bankrupcy_SCROE +13CASHFLOW
+14FINANCE

+15OVERSEASLIST

+16SHAREHOLDING20

+17MINING +18AP_TENURE +19FEERATIO +20RECESSION


+

(1)

Carey and Simnett model


AUDOPINION

0 +1FEMALE +12Bankruptcy_SCORE +9SIZE +8LnAGE


+4LEVERAGE +5Chg_LEVERAGE +6 RETURN +7LOSS
+14FINANCE

+11BIG4

+19FEERATIO

+17MINING +18AP_TENURE +

+13CASHFLOW
(2)

Where,
Dependent Variable
AUDOPINION

Alternative measures of audit opinion:


MODIFIEDOPINION - is coded from 0 to 3 for clean,
unqualified

with

explanatory

notes,

disclaimer/adverse opinions, respectively;

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qualified,

and

FTGCOPINION - 1 if the auditor issues a first-time goingconcern audit opinion, 0 otherwise;


GCOPINION - 1 if the auditor issues a going-concern opinion,
0 otherwise;
QUALIFIED - 1 if the auditor issues a qualified opinion, 0
otherwise;
Test Variable
FEMALE

1 if the audit partner is a female, 0 otherwise;

1 if the auditor issued going-concern in the previous year, 0

Control Variables
Prior_OPINION

otherwise;
CATA

current assets divided by current liabilities;

LEVERAGE

total liabilities divided by total assets;

Chg_LEVERAGE

change in leverage during the year;

RETURN

earnings before interest and taxes divided total assets;

LOSS

1 if the client reported loss in the previous year, 0 otherwise;

LnAGE

natural log of number of years the company has been listed in


the Australian Securities Exchange (ASX);

SIZE

natural log of total assets;

LOCAL

1 if the audit office and client firms are located in the same
region, 0 otherwise;

BIG4

1 if the audit firm is a big 4, 0 otherwise;

Bankruptcy_SCORE

probability of bankruptcy as measured by adjusted Zmijeswki


score;5

CASHFLOW

operating cash flow deflated by total assets;

FINANCE

1 if the company issues equity during the current year, 0


otherwise;

OVERSEASLIST

1 if the company is listed in other country(ies), 0 otherwise;

SHAREHOLDING20 =

percentage of shares holding by the TOP20 shareholders;

MINING

1 if the company belongs to mining industry, 0 otherwise;

5
Consistent with Carcello et al. (1995), Geiger and Rama (2006), we calculated Zmijewski score as weightings
of b* = -4.803 -3.6(net profit after tax divided by total assets) + 5.4(total liabilities divided by total assets)
0.1(current assets divided by current liabilities). Other studies examining going concern opinions in particular
use the more complex bankruptcy prediction model from Hopwood et al. (1989). See for example Carey et al.
(2012).
15

AP_TENURE

natural log of audit partners engagement tenure with the current


auditee;

FEERATIO

non-audit fees divided by the total of audit and non-audit fees;

RECESSION

1 if the financial year is 2008 or later, 0 otherwise.

The variable of interest of this study is FEMALE, coded as 1 if the signing audit partner is a
female and 0 otherwise. Prior year audit opinion may be a good indicator of the current years
opinion because the past conditions may still exist in the current year (Monroe and Teh 1993)
and we use Prior_OPINION as a control variable. The auditor considers performance of the
company in issuing audit opinions (Monroe and Teh 1993; Carey and Simnett 2006; Chen et
al. 2010; Chi et al. 2010). We use CATA, RETURN, LOSS, Bankruptcy_SCORE and
CASHFLOW to control this effect. The auditor also considers the riskiness of the clients
(Carey and Simnett 2006; Chen et al. 2010; Chi et al. 2010) and we control LEVERAGE and
Chg_LEVERAGE. To control the audit quality difference, we use BIG 4 audit firms. Large
companies have less uncertainty and auditors are less likely to issue modified opinions and
we use natural log of total asset (SIZE) as a control variable. Companies listed in the stock
exchange for a longer period (AGE) may have less uncertainty and auditor may not issue a
modified opinion.

Locality of the auditor may develop a personal relationship with the client and auditor may
not issue a modified opinion and we use LOCAL as a control variable. During the recession
in 2008, auditors were conservative to avoid the risk and issued more modified opinions than
previous periods (Xu et al. 2011) and we control RECESSION. Mining companies have
different characteristics and risk profile (Carey et al. 2012) than other companies so we
control MINING to minimise this effect. The auditor may less likely to modify audit opinion
when FEERATIO is higher. The auditor may not issue a modified opinion when the audit
partner tenure (AP_TENURE) is longer. An injection of finance, such as new equity
16

(FINANCE) may preclude a modified opinion. Companies listed in other countries and the
shareholders concentration may affect audit opinion due to the higher scrutiny from the
stakeholders and analysts and we control OVERSEASLIST and SHAREHOLDING20 as
control variables.

RESULTS
Descriptive Statistics
To answer the first research question, are there systematic differences between the auditor
gender and both audit firms and audit clients characteristics. Tables 3-7 provide descriptive
characteristics of the sample companies. Column 1 and 2 of Table 3 provide the descriptives
for the full sample based on female and male auditors. For the full sample, there are
significant differences in four control variables. In terms of audit firm characteristics
measured dichotomously, there is a difference between female and male engagements in the
BIG4 (0.699 versus 0.506), and the proximity of the location between audit firm and client
LOCAL (0.917 versus 0.866). BIG 4 audit firms have more audit partners and the difference
between the female audit partners of BIG 4 audit firms are significantly higher than non-BIG
4 audit firms. In terms of auditor characteristics, length of tenure is significantly different
AP_TENURE (2.313 years versus 2.866 years). Female audit partners are less experience as
measured by audit partner tenure. There is no significant difference between the audit clients
of male and female audit partners, except for clients who made a loss in the previous year
LOSS (0.496 versus 0.555) of female and male samples. Female audit partners have less
exposure to engagements which incurred loss either in the current or previous years.
Otherwise, these statistics provide evidence of the characteristics of female and male audit
partners sample companies are almost identical in respect of other characteristics such as
size, risk, profitability and complexity (although note that the dummy variable for 2008

17

RECESSION shows a significant difference). If we find a significant association between


auditor gender and the propensity to issue a going-concern opinion for financially distressed
companies, findings will justify the gender affect on audit quality after controlling these
variables.

The other columns in Table 3 provide descriptive statistics of the sample split into types of
opinions clean and modified respectively. Columns 4 and 5 of Table 3 refer to the clean
opinion sample for female and male audit engagements. The descriptive statistics of clean
audit opinion sample is consistent with full sample for female and male auditors. Column 7
and 8 provide descriptive statistics of modified opinion sub- sample for female and male
audit partners companies. There main difference is that the proximity between audit client
and firm LOCAL is no longer different but there is a significant difference between the
female and male samples for FEERATIO.

<PLEASE INSERT TABLE 3 ABOUT HERE>

Female Auditors over the Period


Table 4 provides the gender of audit partners over the sample period. The results show that
other than 2006, every year the number of female audit engagements increased. The
percentage of clients audited by the female audit partners was gradually increased from 2003
and it was highest in 2009 (6.75 percent). The findings indicate that more female auditors are
now auditing the clients than before.

<PLEASE INSERT TABLE 4 ABOUT HERE>

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Female Auditors for BIG4 and Non-BIG4 Audit Firms


Table 5 identifies whether there was any difference of audit clients audited by female and
male audit partners between BIG 4 and non-BIG 4 audit firms. The results shows that the
average female audit partners for BIG 4 audit firms are higher than the non-BIG 4 audit firms
and the difference is significant (p < 0.001). The mean of female audit partners clients for
BIG 4 audit firms was 6.49 percent and it was 2.97 percent for non-BIG 4 during the sample
periods.
<PLEASE INSERT TABLE 5 ABOUT HERE>

Auditor Tenure differences between Female and Male Audit Partners


Table 6 shows the average audit firm and audit partner tenures for female and male audit
partners. The result shows that the audit firm tenure is shorter if the audit partner is female
(female = 6.30 years and male = 6.74 years), however, the difference is not significant.
Alternatively, audit partner tenure is significantly lower if the audit partner is female (female
= 2.31 years and male = 2.86 years).
<PLEASE INSERT TABLE 6 ABOUT HERE>

Audit Opinion differences between Female and Male Auditors


Table 7 shows the types of audit opinion issued by the female and male audit partners during
the sample periods. The results show that modified opinion issued by the female (12 percent)
audit partners is less than their counterpart (19 percent) and the difference was significant (p
< 0.001). The results are consistent for prior years audit opinion (11 percent and 16 percent),
going-concern opinions (5 percent and 7 percent) and qualified opinions (1 percent and 3
percent). To identity whether the female audit partners issued clean audit opinion in the
current year from modified opinion in the previous period and vice-versa, female audit

19

partners changed fewer percentage of modified to clean opinions than male audit partners (5
percent and 7 percent respectively) and the difference was significant (p = 0.025). Female
audit partners were also issue less modified opinion in the current year from previous
periods clean opinion than male (4 percent and 5 percent respectively), but the difference
was not significant (p = 0.192). The results show the judgmental difference between the
female and male auditor in issuing the types of audit opinions.
<PLEASE INSERT TABLE 7 ABOUT HERE>
Univariate statistics
To answer the second research question whether the female audit partner is less likely to
issue a going-concern opinion for financially distressed companies, we present the result sof
the audit opinion model. Table 8 presents Pearsons correlation coefficients for the test and
independent variables. Then, we provide the results of multivariate analysis to test the
associations between auditor gender and the likelihood of issuing a going-concern opinion for
financially distressed firms. The correlation of both the current opinion and previous years
audit opinion (Prior_OPINION) are negative and significant with FEMALE indicating that
the female audit partners are less likely to issue modified opinions. The correlation of
AP_TENURE is negative and significant with FEMALE indicating that the audit partner
tenure is shorter if the partner is a female. The correlation of LOSS is negative and significant
with FEMALE. The correlation of size (SIZE) and auditor type (BIG 4) are positive and
significant with FEMALE. RECESSION is also positive and significant with FEMALE. All
other control variables are not significant.
<PLEASE INSERT TABLE 8 ABOUT HERE>

Multivariate statistics

20

Table 9 provides Regression results for all AUDOPINION models. In all cases, the type of
audit opinion is negative and significantly associated with the female auditor. In the first
column, consistent with Chen et al. (2010), OPINION is coded from 0 to 3 for clean,
unqualified with explanatory notes, qualified, and disclaimer/adverse opinions, respectively
and run Ordered Logistic Regression.6 The Pseudo R2 is 0.2936. The result shows that female
auditors are less likely to issue modified opinions than male auditors and the association is
significant (p = 0.002, one-tailed). The result is different to the findings of Chin and Chi
(2008), which report that the clients were more likely to receive a modified opinion when
both the leading and concurring auditor were female.

In the second column, audit opinion is classified as 1 if the auditor issues a first-time goingconcern opinion and 0 otherwise and run Logistic Regression. The results show that the
female auditors are less likely to issue first-time going-concern opinions for their clients than
male auditors and the associations are significant (p = 0.034, one-tailed).

In the third column, audit opinion is classified as 1 if the auditor issues a going-concern
opinion and 0 otherwise. Female auditors are also less likely to issue going-concern opinions
than male auditors and the association is significant (p = 0.048, one-tailed).

In the fourth column, consistent with Carey and Simnett (2006), audit opinion is classified as
1 if the auditor issues a going-concern opinion for financially distressed companies and 0
otherwise. Similar to Carey and Simnett (2006), the sample was constrained to financially
distressed companies. Female auditors are less likely to issue going-concern opinions for

6
For model 1, we used Ordered Logistic Regression and Logistic Regression for the others when used a dummy
variable.
21

financially distressed firms and the association is significant (p = 0.017, one tailed). The
findings are robust regardless of alternative classifications of audit opinions.

Analysis
Going concern audit opinion and audit quality linkage?
Borrowing from Carey and Simnett (2006: 660), if after controlling for other factors that
influence the propensity to issue a going concern opinion, the probability of issuing goingconcern is inversely related to the audit partner characteristic (in their case, auditor tenure, in
our case, gender), this suggests diminution of audit quality. However, in their study, it is
acknowledged that they had a strong motivational link between the auditor characteristic
(tenure), auditor independence (impaired) and audit quality (going concern opinion). In our
study, we acknowledge at this stage the link between the auditor characteristic (female) and
audit quality is speculative.

All going concern dependent variables


As reported above, the variable of interest, FEMALE is positive and significant across all
dependent variables for going concern opinions. In controlling for other factors influencing
this propensity, we find that, as expected, prior opinion (Prior_OPINION) is always
positively related7 (Monroe and the, 1993). Other strong results show, that as expected, the
various going-concern opinions are associated not only with female auditor and prior opinion,
but also a strong significant result for the financial measures of performance (the quick ratio
CATA is negative), size (SIZE is negative). Weaker significance is shown across all four
dependent variables for a negative association between the going concern opinion and recent
equity raising (FINANCE). The control variables showing no significance across all four

7
Except of course Model 2, where it was not logical to consider prior opinion where the dependent variable is
first time going-concern.
22

models are change in leverage during the year (Chg_LEVERAGE); earnings return
(RETURN); the auditor type (BIG4), the overseas listing status (OVERSEAS); blockholdings
(SHAREHOLDING20) and finally the audit to non-audit fee ratio (FEERATIO).

Leverage (LEVERAGE) is negative and significant, except for the first time going-concern
opinions. Whether the company is in mining is strongly negative (except for no result in first
time going concern opinions) so the perceived riskiness of Australias mining industry is
strongly not associated with going concern opinions. Whether the firm has made a loss
(LOSS) is positive and significant to the dependent variable, except for the going concern
opinion for financially distressed firms.

First-time going concern dependent variable


Only the age of the audit client is positive and significant for first time going concern
opinions, and not for the other models, meaning older firms (based on listing age AGE) are
less likely to have this type of opinion.

Going-concern opinion for financially distressed firms dependent variable


When it comes to the sample of going-concern opinion for financially distressed firms, there
are three different results. The prior year loss (LOSS) is not significant (unlike the other
models), further, in this model, it does not matter if the opinion is given during the time of
recession (RECESSION), unlike for the other three models. There is a significant and
negative relation between the going-concern opinion for financially distressed firms and the
proximity between auditor and client (LOCAL).

<PLEASE INSERT TABLE 9 ABOUT HERE>

23

ADDITIONAL ANALYSIS
Robustness Checks
To validate the findings whether the results are sensitive with opinion prediction model, the
current study replicates Carey and Simnett (2006) model. The results are remained consistent
for four opinion measures (Table 10, Panel A). Thus, the results are robust regardless of using
opinion prediction models.

<PLEASE INSERT TABLE 10, Panel A ABOUT HERE>

To identify the audit quality difference between BIG 4 and non-BIG 4 auditors (Table 10,
Panel B), the sample is split into two subsamples. The female auditors of BIG 4 auditors are
less likely to issue modified opinions (p = 0.018) than male audit partners. However, the
association between the female auditors of non-BIG 4 audit firms and modified opinion is not
significant (p = 0.103). The findings may provide insight that there are few female audit
partners in non-BIG 4 firms and higher number of audit clients is audited by female audit
partners for BIG 4 audit firms.

<PLEASE INSERT TABLE 10 PANEL B ABOUT HERE>

Most of the prior studies (Carey and Simnett 2006; Hardies et al. 2010a) exclude financial
sector firms in their analysis. To test whether the results are sensitive to industry, the current
study ran the model excluding financial sector (GICS 4010 to 4040) (Table 10, Panel B). The
result remained significant and negative (p = 0.032, two-tailed). Thus, the findings are not
sensitive with the industry classification.

24

To test whether the female audit partner is less likely to qualify (extreme cases) the audit
report than male audit partners, the audit opinion is coded as 1 if the client received a
qualified opinion and 0 otherwise (Table 10, Panel B). The associations between the female
audit partners and audit qualification is not significant (p = 0.142). The findings indicate that
in an extreme case when auditor has to issue a qualified audit opinion, there is no significant
difference between female and male audit partner.

To identify whether the audit clients choose a female audit partner for opinion shopping, the
opinion is classified into two groups such as when the auditor issued a clean opinion in the
previous year and a modified opinion in the current year and vice-versa (Table 10, Panel C).
The association between female audit partners and audit opinion from modify to clean is not
significant. However, the association between female audit partners and audit opinion from
clean to modified is significant and negative (p = 0.012) indicating that female audit partners
are less likely to change from clean audit opinion in previous year to modified opinion in the
current year. The findings provide evidence of opinion shopping because female audit
partners are less likely to issue a modified opinion in the current year.
<PLEASE INSERT TABLE 10 PANEL C ABOUT HERE>

Ooghe and Spaenjers (2005, cited in Hardies et al. 2010a) argue that if the
Bankruptcy_SCORE is less than 0.531, this indicates acute financial problems and the auditor
may issue a modified opinion. Thus, we ran the model (Table 10, Panel C) with a limited
sample based on this criterion for financially distressed firms. The result of this logistic
regression is consistent with the results of the full sample indicating that the model is robust
regardless of the specifications and sample-selection criteria.

25

SUMMARY AND CONCLUSION


Carey and Simnett (2006) hypothesised and were able to show a negative relation between
going concern opinion and auditor tenure. They modeled audit opinion as one measure of
audit quality, and linked this argument to auditor independence. That is, in examining the
auditor specific characteristic of tenure, it has been argued that auditors with longer tenure
impair independence, hence reducing audit quality.

This argument is not without its

detractors, as the counter argument is that longer tenure means more experience, leading to
quality audits (Myers et al. 2003). In designing this study, we adapted the Carey and Simnett
(2006) model to examine another auditor specific characteristic, gender. We hypothesised
that female auditors are less likely to issue modified opinions than male auditors. To motivate
this hypothesis by sex differences alone in arguably flawed (Hardies et al. 2010a), but it is the
beginning of a research process to recognise that individual auditor characteristics matter
(Church et al. 2008).

Using a unique data set, this study investigates whether the auditor gender affects audit
outcomes in an environment where the name of audit partners has been disclosed for a long
period and audit partner(s) has to sign personally in the audit report. Audit opinion is one of
the accepted measures of audit quality and this study examines going concern opinions. The
number of audit engagements by female auditors has increased significantly over the sample
period. Prior studies argue that there are behavioural differences between the female and male
auditors such as - females are risk averse (Hinz et al. 1997; Byrnes et al. 1999; Dwyer et al.
2002), employ more comprehensive and detailed cognitive information processing (Gold et
al. 2009), apply higher ethical standard in decision making (Ford and Richardson 1994;

26

Ambrose and Schminke 1999; Thorne et al. 2003) and more accurate in audit judgment than
male (Gold et al. 2009).

The results reveal that female audit partners are less to likely to issue modified opinions, firsttime going-concern opinion, going-concern opinion and going-concern opinion for
financially distressed firms. As well as whether the auditor is female, the strong results from
the control variables that are consistent across all models are that going concern opinion is
positively associated with the prior year opinion, whether the firms reported a loss and
negatively associated with the quick ratio and the size of the firm. The findings have
implications for training, recruitment and assignment to audit engagements. The results are
robust in a number of sensitivity tests. We find that audit partner tenure is significantly lower
if the audit partner is female. We also find that there are significant difference of number of
female audit partners between BIG 4 and non-BIG 4 audit firms. The findings of this study
are robust because there are no significant differences of size, age, overseas listing and other
control variables between the female and male engagements.

The results of this paper should be interpreted with some possible limitations. First, the
results may not be generalizable to other countries where there are different regulatory
environments and have not similar audit markets. For example, Australian audits since 2004
have been subject to enhanced auditor independence laws such as mandatory audit partner
rotation and mandatory audit standards. However, the findings of the study are robust after
controlling most of influencing factors of audit opinion including overseas listing. Second,
this study uses only lead audit partner gender, however, the fieldwork is conducted by audit
team and the gender of the audit team may have an effect on audit quality. However,
information of audit team gender and audit team is not available; hence it is not possible to

27

conduct empirical research. Finally, the results are for the sample companies and for the
sample period. We cannot rule out the effects of the others companies and other sample
periods and exclusion of other variables in predicting audit opinion.

The findings of the study identify the avenues for future research. First, future research would
consider the gender of the CEO, CFO, female representation in the board as well as audit
committee and investigate their affects on audit partner choice. Second, future study also
would investigate the other characteristics of audit partners such as experience, age,
expertise, industry specialisation and their affects on audit quality. Finally, future study
would also consider using other proxy of audit quality such as earnings management, analyst
forecast and beat and meet earnings targets.

28

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Table 1
Sample description
Sample characteristics

Number of firm-year
observations
11 246
42
46
872
10 286

Number of firm-year observations


Double auditor partners
Gender cannot be identified
Required data not available
Final sample

Table 2
Industry classification
GICS Code (Industry)
1010 (Energy)

Frequency
926

Percent

2010 (Capital Goods)

602

5.85%

2020 (Comm. & Prof. Services)

417

4.05%

2030 (Transportation)

146

1.42%

74

0.72%

2520 (Consumer Durables & Apparel)

125

1.22%

2530 (Consumer Services)

282

2.74%

2540 (Media)

289

2.81%

2550 (Retailing)

251

2.44%

55

0.53%

277

2.69%

0.06%

3510 (Health Care Equipment & Services)

416

4.04%

3520 (Phar, Biotech & Life Science)

478

4.65%

94

0.91%

951

9.25%

2510 (Automobiles & Component)

3010 (Food & Staples Retailing)


3020 (Food, Beverage & Tobacco)
3030 (Household & Personal Products)

4010 (Banks)
4020 (Diversified Financials)

32

9.00%

4030 (Insurance)

160

1.56%

4040 (Real Estate)

577

5.61%

4510 (Software & Services)

563

5.47%

4520 (Tech Hardware & Equipment)

212

2.06%

0.09%

5010 (Telecommunication Services)

198

1.92%

5510 (Utilities)

144

1.40%

151010 (Chemicals)

71

0.69%

151020 (Construction Materials)

49

0.48%

151030 (Containers & Packaging)

31

0.30%

2822

27.44%

61

0.59%
100.00%

4530 (Semicond & Semiconductor Equip.)

151040 (Metals & Mining)


151050 (Paper & Forest Products)
Total

10 286

33

Table 3
Descriptive statistics (n = 10 286)
Variables

Full sample

Clean audit opinion sample

Female
(n = 492)
2244.146

Male
(n = 9 794)
1987.423

t
0.244

Female
(n = 433)
2541.516

Male
(n = 7 969)
2418.134

t
0.099

Female
(n = 59)
61.755

Male
(n = 1 825)
107.340

t
-0.419

CATA

0.432

0.442

-0.751

0.417

0.445

-1.941*

0.539

0.430

2.556**

LEVERAGE

1.901

27.829

-0.233

1.978

33.601

-0.240

1.336

2.633

-0.748

Chg_LEVERAGE

-0.161

2.804

-0.623

-0.398

3.214

-0.644

1.575

1.014

0.283

RETURN

-0.330

-0.493

0.332

-0.101

-0.318

0.400

-2.014

-1.256

-0.673

LOSS

0.496

0.555

-2.584***

0.432

0.487

-2.252**

0.966

0.852

2.461**

AGE

12.504

13.283

-0.737

12.598

13.438

-0.685

11.814

12.608

-0.597

LOCAL

0.917

0.866

3.237***

0.926

0.878

2.993***

0.847

0.813

0.663

BIG4

0.699

0.506

8.403***

0.718

0.550

6.872***

0.559

0.311

4.035***

Bankrupcy_SCROE

0.844

1.229

-0.329

0.847

1.232

-0.331

0.823

1.218

-0.093

-0.130

0.960

-0.218

-0.037

-0.018

-0.067

-0.811

5.230

-0.181

FINANCE

0.685

0.704

-0.924

0.684

0.699

-0.677

0.695

0.729

-0.570

OVERSEASLIST

0.069

0.082

-1.000

0.074

0.081

-0.537

0.034

0.084

-1.383

SHAREHOLDING20

0.616

0.630

-1.598

0.619

0.634

-1.654*

0.597

0.612

-0.616

MINING

0.240

0.277

-1.786*

0.226

0.268

-1.899*

0.339

0.316

0.376

AP_TENURE

2.313

2.866

-5.246***

2.291

2.873

-5.307***

2.475

2.834

-1.077

FEERATIO

0.207

0.210

-0.360

0.221

0.222

-0.057

0.100

-2.372**

RECESSION

0.419

0.325

4.322***

0.418

0.306

4.903***

0.424

0.160
0.407

TA

CASHFLOW

*, ** and *** represent significant at 10%, 5% and 1% respectively.

34

Modified audit opinion sample

0.254

Table 4
Male and Female Auditors during 2003-2009
M/Female
Auditor
1
0
Total

2003
Frequency Percent
48
3.87%
1 192
96.13%
1 240

2004
Frequency Percent
54
4.31%
1 199
95.69%

100.00%

1 253

100.00

2005
Frequency Percent
58
4.04%
1 379
95.96%
1 437

100.00

2006
Frequency Percent
56
3.91%
1 375
96.01%
1 431

2007
Frequency Percent
70
4.56%
1 465
95.44%

100.00%

1 535

2008
Frequency Percent
85
5.32%
1 514
94.68%

100.00%

1 599

100.00%

1 if female and 0 male

Table 5
Male and Female auditor partner for BIG4 and non-BIG4 audit firms during 2003-2009
BIG4
Non-BIG4
Independent sample t-test
M/F
Auditor
Frequency
Percent
Frequency
Percent
F-statistic
t
p
1
344
6.49%
148
2.97%
1809.72
-8.41
<0.001
0
4 952
93.51%
4 842
97.03%
Total
5 297
100.00
4 990
100.00
1 if female and 0 male
Table 6
Auditor tenure differences between Female and male audit partner
Gender
Female

Audit firm tenure

492

Mean
6.30

Std. Deviation
4.823

Audit partner tenure

Male
Female

9 794
492

6.74
2.31

6.494
1.545

Male

9 794

2.87

2.311

1 if female and 0 male

35

F
25.103

t
-1.464

Sig. (2-tailed)
0.143

20.478

-5.246

<0.001

2009
Frequency Percent
121
6.75%
1 671
93.25%
1 792

100.00%

Table 7
Audit opinion differences between female and male audit partner
Variables
MODIFIEDOPINION

1
0

Gender

N
492
9 794

Mean
0.12
0.19

Std. Deviation
0.33
0.39

F
66.70

t
-3.72

Sig. (2-tailed)
<0.001

Prior_OPINION

1
0

492
9794

0.11
0.16

0.32
0.37

44.55

-3.111

0.002

GOINGCONCERN

1
0

492
9 794

0.11
0.16

0.31
0.37

37.84

-2.89

0.004

FTGCOPINION

1
0

492
9 794

0.05
0.07

0.21
0.25

11.01

-1.63

0.104

QUALIFIED

1
0

492
9 794

0.01
0.03

0.10
0.17

23.71

-2.39

0.017

CLEANMODIFIED

1
0

492
9 794

0.04
0.05

0.19
0.22

7.01

-1.31

0.192

MODIFIEDCLEAN

1
0

492
9 794

0.05
0.07

0.21
0.26

21.29

-2.24

0.025

1 if female and 0 male

36

Table 8
Pearsons correlation coefficients (n = 10 286)
Variables
FEMALE
MODIFIEDOPINON
FTGCOPINION
GOINGCONCERN
Prior_OPINION
CATA
LEVERAGE
Chg_LEVERAGE
RETURN
LOSS
LnAGE
SIZE
LOCAL
BIG4
Bankrupcy_SCROE
CASHFLOW
FINANCE
OVERSEASLIST
SHAREHOLDING20
MINING
AP_TENURE
FEERATIO
RECESSION

FEMALE
1
-.039**
.000
-.016
.104
-.028**
.004
-.031**
.002
-.007
.453
-.002
.816
-.006
.533
.003
.740
-.025**
.010
-.011
.266
.024*
.014
.032**
.001
.083**
.000
-.003
.742
-.002
.827
-.009
.356
-.010
.317
-.016
.110
-.018
.074
-.055**
.000
-.004
.719
.043**
.000

MODIFIEDOPINON

FTGCOPINION

GOINGCONCERN

Prior_OPINION

LEVERAGE

Chg_LEVERAGE

RETURN

LOSS

LnAGE

SIZE

1
**

.427
.000
.714**
.000
.551**
.000
-.007
.492
-.004
.657
-.007
.488
-.042**
.000
.263**
.000
.025*
.012
-.305**
.000
-.076**
.000
-.174**
.000
.011
.245
.013
.202
.021*
.029
-.001
.953
-.034**
.000
.024*
.016
-.022*
.023
-.107**
.000
.069**
.000

1
.611**
.000
-.115**
.000
-.040**
.000
-.003
.790
-.002
.815
-.003
.740
.138**
.000
-.062**
.000
-.115**
.000
-.024*
.014
-.064**
.000
-.006
.548
-.003
.795
-.009
.349
.005
.646
-.023*
.019
.049**
.000
-.030**
.002
-.061**
.000
.099**
.000

1
**

.491
.000
-.012
.212
-.004
.666
-.007
.471
-.026**
.008
.271**
.000
-.007
.450
-.285**
.000
-.061**
.000
-.168**
.000
-.014
.144
.021*
.029
.025*
.011
.012
.240
-.048**
.000
.061**
.000
-.023*
.018
-.106**
.000
.086**
.000

1
**

.045
.000
-.004
.663
.000
.994
-.031**
.002
.283**
.000
.061**
.000
-.323**
.000
-.068**
.000
-.190**
.000
.004
.666
.021*
.036
.073**
.000
.017
.089
-.033**
.001
.045**
.000
-.003
.795
-.087**
.000
-.004
.709

** and * represent significant at 1% and 5% levels respectively.

37

CATA

1
-.014
.151
-.011
.257
-.051**
.000
.122**
.000
-.075**
.000
-.371**
.000
.003
.772
-.090**
.000
.005
.636
.016
.099
-.064**
.000
-.042**
.000
.036**
.000
-.067**
.000
.010
.312
-.053**
.000
-.017
.090

1
.000
.977
-.001
.903
-.011
.275
-.010
.327
.011
.273
.004
.690
.009
.348
.633**
.000
.000
.992
-.015
.123
-.003
.768
.005
.638
-.006
.560
.009
.382
-.003
.796
-.008
.445

1
.001
.934
-.008
.393
-.011
.282
.002
.878
-.001
.900
-.011
.279
-.001
.916
.000
.974
.012
.216
-.005
.640
.009
.383
-.006
.571
-.014
.146
-.009
.364
-.020*
.044

1
-.045**
.000
-.009
.368
.100**
.000
.009
.371
.001
.949
-.123**
.000
.043**
.000
-.003
.794
.002
.855
-.003
.750
-.012
.220
.018
.074
.001
.885
.000
.991

1
-.143**
.000
-.568**
.000
-.095**
.000
-.269**
.000
-.015
.129
.007
.499
.126**
.000
.052**
.000
-.168**
.000
.331**
.000
-.011
.262
-.167**
.000
.049**
.000

1
**

.162
.000
-.007
.447
.123**
.000
-.011
.276
-.004
.718
-.036**
.000
.117**
.000
.041**
.000
-.029**
.003
.074**
.000
.029**
.003
-.059**
.000

1
**

.083
.000
.445**
.000
-.004
.701
-.026**
.009
.012
.231
.082**
.000
.083**
.000
-.228**
.000
-.028**
.004
.279**
.000
.020*
.040

Table 8 (contd.)
Variables
LOCAL
BIG4
Bankrupcy_SCROE
CASHFLOW
FINANCE
OVERSEASLIST
SHAREHOLDING20
MINING
AP_TENURE
FEERATIO
RECESSION

LOCAL
1
.045**
.000
-.008
.400
.005
.595
-.020*
.043
-.015
.133
-.006
.523
-.004
.677
-.009
.376
.021*
.030
.028**
.004

Bankruptc
y_SCORE

BIG4

CASHFLOW

FINANCE

OVERSE
ASLIST

MINING

AP_TENURE

FEERATIO

RECESSION

1
.019*
.050
-.010
.327
-.039**
.000
.001
.935
.048**
.000
-.139**
.000
-.050**
.000
.236**
.000
-.091**
.000

1
-.007
.506
-.028**
.004
-.008
.402
.017
.087
-.017
.076
.011
.286
-.006
.532
-.017
.085

1
.007
.460
-.003
.774
.005
.620
-.006
.547
.015
.127
-.009
.382
-.007
.472

1
.066**
.000
-.176**
.000
.141**
.000
-.024*
.015
.030**
.002
-.138**
.000

1
.003
.731
.114**
.000
-.011
.253
-.007
.490
.040**
.000

38

SHAREHO
LDING20

1
-.131**
.000
-.023*
.018
.055**
.000
-.003
.792

1
.045**
.000
-.127**
.000
.057**
.000

1
.036**
.000
-.128**
.000

1
-.151**
.000

Table 9
Regression
AUDOPINION = 0 +1FEMALE +2Prior_OPINION +3CATA +4LEVERAGE +5Chg_LEVERAGE +6RETURN
+7LOSS +8LnAGE +9SIZE +10LOCAL +11BIG4 +12Bankrupcy_SCROE +13CASHFLOW +14FINANCE
+15OVERSEASLIST +16SHAREHOLDING20 +17MINING +18AP_TENURE +19FEERATIO +20RECESSION +

Modified opinion
(Ordered Logistic
Regression)
Variables
FEMALE
Prior_OPINION
CATA
LEVERAGE
Chg_LEVERAGE
RETURN
LOSS
LnAGE

SIZE
LOCAL
BIG4
Bankruptcy_SCORE
CASHFLOW
FINANCE
OVERSEASLIST
SHAREHOLDING20
MINING
AP_TENURE
FEERATIO
RECESSION

Coefficient
(z)
-0.459***
(-2.870)
2.577***
(30.660)
-1.362***
(-10.080)
-0.007***
(-2.660)
-0.001
(-1.080)
-0.002
(-0.490)
0.723***
(7.610)
0.057
(1.360)
-0.315***
(-11.260)
-0.233***
(-2.700)
-0.062
(-0.820)
0.001
(0.830)
0.000***
(-2.940)
-0.155**
(-2.060)
-0.073
(-0.630)
0.014
(0.080)
-0.409***
(-5.280)
-0.096**
(-1.980)
-0.151
(-0.820)
0.479***
(4.520)

_cons
YEAR
FirmCluster
N
Wald chi2(20)
Prob > chi2
Pseudo R2

included
Yes
10 286
2348.23
<0.001
0.2936

First time goingconcern

Going-concern
opinion

Going-concern opinion for


financially distressed firms

(Logistic Regression)

(Logistic Regression)

(Logistic Regression)

Coefficient
(z)
-0.392**
(-1.830)
-1.353***
(-8.440)
-0.004
(-1.330)
0.000
(-0.040)
0.004
(0.810)
0.911***
(7.360)
-0.199***
(-4.340)
-0.219***
(-7.270)
-0.111
(-1.020)
0.115
(1.260)
-0.001
(-0.590)
0.000
(-1.490)
-0.174*
(-1.850)
0.067
(0.460)
0.108
(0.490)
-0.133
(-1.550)
-0.115*
(-1.750)
-0.154
(-0.740)
0.744***
(4.530)
1.250**
(2.140)
included
Yes
10 286
405.63
<0.001
0.0910

39

Coefficient
(z)
-0.331**
(-1.660)
2.259***
(25.890)
-1.187***
(-7.590)
-0.006**
(-2.210)
-0.001
(-0.920)
-0.003
(-1.340)
0.859***
(8.680)
-0.040
(-0.890)
-0.274***
(-8.660)
-0.139
(-1.350)
-0.058
(-0.680)
-0.012**
(-2.150)
0.000**
(1.990)
-0.165**
(-1.980)
0.067
(0.540)
-0.068
(-0.330)
-0.181**
(-2.200)
-0.107**
(-2.040)
-0.161
(-0.890)
0.525***
(4.270)
2.558***
(4.270)
included
Yes
10 286
1597.36
<0.001
0.2904

Coefficient
(z)
-0.398**
(-2.130)
2.598***
(30.200)
-1.475***
(-10.640)
-0.007***
(-2.720)
-0.002
(-1.180)
-0.003
(-0.840)
0.144
(1.380)
0.053
(1.050)
-0.290***
(-9.730)
-0.203**
(-2.120)
-0.042
(-0.510)
-0.001
(-1.140)
0.000
(1.020)
-0.170**
(-2.030)
-0.093
(-0.730)
-0.012
(-0.060)
-0.506***
(-6.490)
-0.005
(-0.640)
-0.023
(-1.500)
-0.277
(-1.520)
3.909***
(7.170)
included
Yes
6636
1449.27
<0.001
0.2854

***, ** and * indicate one-tailed (control variables are two-tailed) p-value for test variables and significant 1%,
5% and 10% respectively.
AUDOPINION = Alternative measures of audit opinion; OPINION = is coded from 0 to 3 for clean, unqualified
with explanatory notes, qualified, and disclaimer/adverse opinions, respectively; FTGCOPINION = 1 if the
auditor issues a first-time going-concern audit opinion, 0 otherwise; GCOPINION = 1 if the auditor issues a
going-concern opinion, 0 otherwise; QUALIFIED = 1 if the auditor issues a qualified opinion, 0 otherwise;
FEMALE = 1 if the audit partner is a female, 0 otherwise; Prior_OPINION = 1 if the auditor issued goingconcern in previous year and 0 otherwise; CATA = current assets divided by current liabilities; LEVERAGE =
total liabilities divided by total assets; Chg_LEVERAGE = change in leverage during the year; RETURN =
earnings before interest and taxes divided total assets; LOSS = 1 if the client reported loss in the previous year,
0 otherwise; LnAGE = natural log of number of years the company has been listed in the Australian Securities
Exchange (ASX); SIZE = natural log of total assets; LOCAL = 1 if the audit office and client firms are located
in the same region, 0 otherwise; BIG4 = 1 if the audit firm is a big 4, 0 otherwise; Bankruptcy_SCORE =
probability of bankruptcy as measured by adjusted Zmijeswki score; CASHFLOW = operating cash flow
deflated by total assets; FINANCE = 1 if the company issues equity during the current year, 0 otherwise;
OVERSEASLIST = 1 if the company is listed in other country(ies), 0 otherwise; SHAREHOLDING20 =
percentage of shares holding by the TOP20 shareholders; MINING = 1 if the company belongs to mining
industry, 0 otherwise; AP_TENURE = natural log of audit partners engagement tenure with the current auditee;
FEERATIO = non-audit fees divided by the total of audit and non-audit fees; RECESSION = 1 if the financial
year is 2008 or later, 0 otherwise.

40

Table 10
Logistic regression
AUDOPINION = 0 +1FEMALE +12Bankrupcy_SCROE +9SIZE +8LnAGE +4LEVERAGE
+5Chg_LEVERAGE +6 RETURN +7LOSS +14FINANCE +11BIG4 +19FEERATIO +13CASHFLOW
+17MINING +18AP_TENURE +

Panel A: Carey and Simnett model


Modified opinion

First time
going-concern

Going-concern
opinion

Coefficients
Coefficients
Coefficients
(z)
(z)
(z)
-0.477**
-0.393*
-0.365*
FEMALE
(-2.360
(-1.870)
(-1.700)
-0.001
-0.002
-0.013*
Bankruptcy_SCORE
(-0.530)
(-0.620)
(-1.800)
-0.359***
-0.122***
-0.307***
SIZE
(-13.500)
(-4.680)
(-11.380)
0.274***
-0.163***
0.192***
LnAGE
(5.540)
(-3.600)
(3.940)
-0.007***
-0.004
-0.006***
LEVERAGE
(-2.750)
(-1.190)
(-2.630)
-0.001
0.000
-0.001
Chg_LEVERAGE
(-0.630)
(0.120)
(-0.640)
0.000
0.003
-0.001
RETURN
(-0.090)
(0.820)
(-0.550)
1.150***
0.973***
1.222***
LOSS
(11.790)
(8.130)
(11.980)
-0.036
0.002
-0.002
INVESTMENTS
(-0.810)
(1.430)
(-1.170)
-0.292***
0.042
-0.271***
BIG4
(-3.260)
(0.460)
(-2.860)
-0.136
-0.288
-0.168
FEERATIO
(-0.750)
(-1.380)
(-0.950)
0.000
0.000
0.000**
CASHFLOW
(1.570)
(-1.470)
(2.450)
-0.380***
-0.039
-0.238**
MINING
(-3.990)
(-0.460)
(-2.530)
-0.126*
-0.120**
-0.125**
AP_TENURE
(-2.550)
(-1.890)
(-2.370)
3.461***
-1.073**
2.431***
_cons
(7.570)
(-2.290)
(5.270)
YEAR
Included
Included
Included
FirmCluster
Yes
Yes
Yes
N
10 286
10 286
10 286
Wald chi2(20)
680.46
363.64
629.04
Prob > chi2
<0.001
<0.001
<0.001
Pseudo R2
0.1730
0.0745
0.1540
***, ** and * indicate two-tailed p-value and significant 1%, 5% and 10% respectively.
Variables

Going-concern
opinion
for financially
distressed firms
Coefficients
(z)
-0.407*
(-1.980)
-0.001
(-0.430)
-0.293***
(-10.640)
0.276***
(5.400)
-0.008**
(-2.380)
-0.001
(-0.840)
-0.002
(-0.380)
0.460***
(4.540)
-0.040
(-0.590)
-0.295***
(-3.210)
-0.227
(-1.250)
0.000
(0.730)
-0.483***
(-5.190)
-0.106**
(-2.060)
3.222***
(6.860)
Included
Yes
6 632
317.40
<0.001
0.0858

AUDOPINION = Alternative measures of audit opinion; OPINION = is coded from 0 to 3 for clean, unqualified
with explanatory notes, qualified, and disclaimer/adverse opinions, respectively; FTGCOPINION = 1 if the
auditor issues a first-time going-concern audit opinion, 0 otherwise; GCOPINION = 1 if the auditor issues a
going-concern opinion, 0 otherwise; QUALIFIED = 1 if the auditor issues a qualified opinion, 0 otherwise;
FEMALE = 1 if the audit partner is a female, 0 otherwise; Bankruptcy_SCORE = probability of bankruptcy as
measured by adjusted Zmijeswki score; SIZE = natural log of total assets; LnAGE = natural log of number of
years the company has been listed in the Australian Securities Exchange (ASX); LEVERAGE = total liabilities
41

divided by total assets; Chg_LEVERAGE = change in leverage during the year; RETURN = earnings before
interest and taxes divided total assets; LOSS = 1 if the client reported loss in the previous year, 0 otherwise;
FINANCE = 1 if the company issues equity during the current year, 0 otherwise; BIG4 = 1 if the audit firm is a
big 4, 0 otherwise; FEERATIO = non-audit fees divided by the total of audit and non-audit fees; CASHFLOW =
operating cash flow deflated by total assets; MINING = 1 if the company belongs to mining industry, 0
otherwise; AP_TENURE = natural log of audit partners engagement tenure with the current auditee.

42

Table 10
Panel B: Additional sensitivity analysis

Variables
FEMALE
Prior_OPINION
CATA
LEVERAGE
Chg_LEVERAGE
RETURN
LOSS
LnAGE

SIZE
LOCAL
BIG4
Bankruptcy_SCORE
CASHFLOW
FINANCE
OVERSEASLIST
SHAREHOLDING20
MINING
AP_TENURE
FEERATIO
RECESSION

Ordered Logistic Regression


BIG4
Non_BIG4
Exclude
financial sector
Coefficients
Coefficients
Coefficients
(z)
(z)
(z)
-0.466**
-0.450
-0.369**
(-2.370)
(-1.630)
(-2.160)
2.634***
2.554***
2.478***
(19.170)
(24.260)
(28.800)
-0.947***
-1.606***
-1.643***
(-4.180)
(-9.300)
(-11.540)
-0.014**
-0.007
-0.007**
(-2.400)
(-1.520)
(-2.470)
0.000
-0.001
-0.001
(0.100)
(-0.990)
(-0.870)
0.003
-0.019
0.001
(1.010)
(-0.690)
(0.180)
0.861***
0.609***
0.709***
(6.000)
(4.720)
(6.720)
0.020
0.061
0.077*
(0.290)
(1.160)
(1.770)
-0.271***
-0.341***
-0.348***
(-6.670)
(-7.720)
(-11.590)
-0.363**
-0.161
-0.187**
(-2.380)
(-1.570)
(-2.0300
-0.042
(-0.530)
-0.001
-0.003
-0.001
(-0.890)
(-0.200)
(-0.780)
-0.007**
0.000
-0.007*
(-2.390)
(-0.540)
(-1.660)
-0.253**
-0.079
-0.117
(-2.020)
(-0.830)
(-1.440)
-0.100
-0.065
-0.033
(-0.470)
(-0.450)
(-0.270)
-0.071
0.024
0.004
(-0.240)
(0.110)
(0.020)
-0.197
-0.504***
-0.491***
(-1.400)
(-5.690)
(-6.080)
-0.179**
-0.056
-0.080
(-2.220)
(-0.920)
(-1.550)
-0.009
-0.282
-0.315
(-0.030)
(-1.280)
(-1.570)
0.401***
0.681***
0.349***
(3.530)
(3.800)
(2.630)

_cons
YEAR
Included
Included
Included
FirmCluster
Yes
Yes
Yes
5 299
4 987
8508
N
1118.53
1576.66
1880.89
Wald chi2(20)
<0.001
<0.001
<0.001
Prob > chi2
0.2732
0.2758
0.2887
Pseudo R2
***, ** and * indicate two-tailed p-value and significant 1%, 5% and 10% respectively.

43

Logistic Regression
Qualified
opinion
Coefficients
(z)
-0.781
(-1.470)
2.547***
(13.240)
-0.988***
(-3.440)
-0.021*
(-1.820)
0.000
(-0.370)
-0.002
(-0.580)
-0.039
(-0.190)
0.229**
(2.1400)
-0.250***
(-4.670)
-0.316*
(-1.680)
0.007
(0.040)
0.002*
(1.820)
0.000
(-1.330)
-0.147
(-0.910)
-0.468
(-1.450)
0.269
(0.640)
-0.748***
(-3.120)
-0.048
(-0.420)
0.185
(0.410)
-0.034
(-0.1400
-0.155***
(-0.140)
Included
Yes
10 286
557.63
<0.001
0.238

Table 10
Logistic Regression
Panel C: Clean to modified and modified to clean
Variables
FEMALE
CATA
LEVERAGE
Chg_LEVERAGE
RETURN
LOSS
LnAGE
SIZE
LOCAL
BIG4
Bankruptcy_SCORE
CASHFLOW
FINANCE
OVERSEASLIST
SHAREHOLDING20
MINING
AP_TENURE
FEERATIO
RECESSION

Clean to modified
Coefficients
(z)
-0.533**
(-2.500)
-1.261***
(-8.440)
-0.005
(-1.590)
0.000
(-0.240)
-0.001
(-0.420)
0.780***
(6.500)
-0.155***
(-3.470)
-0.245***
(-8.520)
-0.118
(-1.150)
0.121
(1.410)
-0.002
(-1.110)
0.000*
(-1.790)
-0.148
(-1.640)
0.050
(0.380)
0.228
(1.090)
-0.182**
(-2.250)
-0.158**
(-2.5400
-0.108
(-0.540)
0.741***
(4.750)

Modified to clean
Coefficients
(z)
-0.135
(-0.570)
0.389**
(2.440)
0.000
(-0.280)
0.000
(1.640)
0.008
(0.940)
0.927***
(6.290)
0.240***
(4.450)
-0.185***
(-6.280)
0.077
(0.630)
-0.212**
(-2.050)
0.001
(1.140)
0.000*
(-1.720)
0.763***
(5.890)
0.244*
(1.820)
0.861***
(3.350)
0.025
(0.270)
-0.082
(-1.150)
0.394*
(1.780)
0.145
(0.790)

1.725***
(3.070)
included
Yes
10 286
431.91
<0.001
0.0883

-2.415***
(-3.820)
included
Yes
10 286
300.35
<0.001
0.0820

Prior_OPINION
_cons
YEAR
FirmCluster
N
Wald chi2(20)
Prob > chi2
Pseudo R2

***, ** and * indicate two-tailed p-value and significant 1%, 5% and 10% respectively.

44

Bankruptcy score 0.531


Coefficients
(z)
-0.461**
(-2.000)
-1.625***
(-8.800)
-0.009
(-1.020)
-0.002
(-1.090)
-0.004
(-0.720)
0.761***
(5.840)
0.070
(1.330)
-0.314***
(-8.590)
-0.139
(-1.210)
-0.109
(-1.110)
-0.025
(-1.070)
-0.020
(-0.500)
-0.174*
(-1.650)
-0.175
(-1.190)
0.297
(1.270)
-0.325***
(-3.520)
-0.077
(-1.220)
-0.022
(-0.100)
0.639***
(4.390)
2.688***
(26.410)
3.156***
(4.540)
included
Yes
10 286
1307.71
<0.001
0.3356