Perceived Audit Quality, Modified Audit Opinions and the Likelihood of Liquidating Bankruptcy Among Financially Weak Firms

The paper examines the relationship between audit quality, modified audit opinions and the likelihood of liquidating bankruptcy among financially weak firms. The sample consists of 27,999 Finnish companies. It is argued that the choice of a high-quality auditor signals managers' credibility and that creditors would be more inclined to prefer liquidating bankruptcy as the resolution of financial difficulties if the firm is audited by a low-quality auditor. The results show that liquidating bankruptcy is less common among Big 4 audited firms. A positive association between the likelihood of bankruptcy and different types of modified audit opinions, including opinions with remarks related to the quality and presentation of financial statements, is also found.

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