Qualified audit reports in Finland: evidence from large companies

The purpose of the study is to develop a logistic model based on financial statement information to identify qualified audit reports. The empirical data are retrieved from audit reports from thirty-seven publicly-traded companies (HeSE) in the years 1992, 1993 and 1994. Thus, there are in all 111 audit reports of which only eight are qualified in the way of including remarks or supplementary information. These eight qualifications concerned three companies during the period of study. The qualification decision (0/1) is explained by sixteen financial ratios and by the audit lag. Univariate analysis showed that the qualification of an audit report is mainly associated with low profitability, high indebtedness and low (negative) growth. The multivariate logistic model showed that the likelihood of receiving a qualification is larger, the lower the growth of the firm, the lower the share of equity in balance sheet and the smaller the number of employees. The total error rate of the model in Lachenbruch validation was only 5.4%. When two qualified reports containing remarks on an additional and a separate auditor were considered as non-qualified, the corresponding total error rate for a re-estimated logistic model was as low as 1.8%. This model also included the audit lag as an explanatory variable. The results of the study indicate that an efficient model to explain qualifications in the audit reports of Finnish publicly-traded companies can be found.