Audit Opinion and Earnings Management: The Case of Covid

This study investigates auditors' reporting behavior during a period characterized by aggressive earnings management and a radical change in the operating environment of auditors. Precisely, we examine the audit opinion and earnings management (proxied by discretionary accruals) relationship during the COVID-19 pandemic period, for a sample of non-financial firms in Europe. For an in-depth analysis, the authors segregate the audit opinion qualifications into two categories; qualifications for going-concern uncertainty and qualifications for non-going concern reasons. The results demonstrate that more often than not, audit qualifications are not related to the levels of earnings management in Europe. However, during the pandemic, the likelihood of auditors issuing a qualified audit opinion for going-concern uncertainties is associated with earnings management. We observe that this auditor reporting behavior is more profound for distressed firms and ceases after the pandemic period (2022). Further analysis shows that the likelihood of auditors issuing a non-going concern audit qualification is not related to earnings management but is largely driven by the type of audit opinion issued in the preceding year Finally, the results indicate that in Europe, most audit qualifications are not going-concern-related and the BIG4 auditors qualify less. Overall, the findings are very relevant to investors and financial statement users as prior studies have linked auditor reporting decisions to investor behavior.