Further Evidence on the Association Between Bankruptcies and Prior Audit Opinions after the Sarbanes-Oxley Act

Neil Fargher
Macquarie University
Australia

Liwei Jiang
Macquarie University
Australia

Abstract:
The incidence of bankruptcies with no prior modification of the audit opinion is an issue of continuing importance to regulators. This research note examines the association between bankruptcies and prior audit opinions in the period around the enactment of the Sarbanes-Oxley Act (2002, SOX). Previous research suggests a decline in the proportion of companies going bankrupt without modified opinions after SOX. Recent research however suggests that some effects of SOX are transitory. We therefore revisit evidence that auditors are more likely to issue modified opinions to financially stressed companies in the post-SOX era. The evidence in this study suggests that any increase in auditor conservatism in issuing going-concern audit opinions immediately after SOX has moderated after 2003.