SUBJECT TO AUDIT OPINIONS AND ABNORMAL SECURITY RETURNS - OUTCOMES AND AMBIGUITIES

This paper provides results on the association between abnormal security returns and "subject to" (hereafter ST) audit reports in which an auditor expresses the opinion that the financial statements are fairly presented conditional on the outcome of some uncertainty(ies). Empirical evidence regarding these opinions may be useful to policymakers who are currently reevaluating the ST opinions as one element in a portfolio of standardized, graded opinions available to the auditor (see section 2). Such evidence is also of interest to theorists who seek to develop more complete models of auditor behavior and/or of the role of the audit in information flows in security markets. The primary conclusions of this study are: (1) ST opinions are issued in conjunction with several different types of uncertainties of differing economic significance. (2) Significant negative abnormal returns are observed in the 45-week period before the ST opinion is released, suggesting that certain uncertainties have economic significance but market participants learn of them and assess their implications for firm valuation using information which is available before the auditor's opinion. (3)