Academic journal article Global Journal of Business Research

Effect of Auditor's Judgment and Specialization on Their Differential Opinion between Semiannual and Annual Financial Reports

Academic journal article Global Journal of Business Research

Effect of Auditor's Judgment and Specialization on Their Differential Opinion between Semiannual and Annual Financial Reports

Article excerpt


This study examines the factors that lead to issuing negative opinions on semiannual reports while issuing positive opinions in annual reports from the perspective of auditor-client relationships in listed companies in Taiwan. The empirical results show that the importance of the client is significant positively related to differential opinions while auditor tenure and industry specialists are significant negatively related to differential opinions. The results suggest that auditors have become more conservative and pay more attention to protecting their reputations post-Enron. The conclusion indicates that enhancing auditors ' specialization and independence reduces the opportunity to issue differential opinions in order to evade legal responsibility.

JEL: M41, M42, G12, G32

KEYWORDS: Industry specialist auditor, Auditor tenure, Audit opinion, Value of firms, Risk

(ProQuest: ... denotes formulae omitted.)


Financial statements summarize company performance and operation results for investors. For the purpose of monitoring and assessing companies' future development, the authority in charge of securities in Taiwan specifies that listed and over-the-counter companies must release their financial information quarterly and that the semi-annual reports and the annual report must be audited by certified public accountants. These requirements are stricter than those of most other countries, where semiannual reports do not have to be audited. The Generally Accepted Auditing Standards (GAAS) No. 33 of Taiwan classified the auditor's opinion into five categories: unqualified opinion, modified unqualified opinion (add an explanatory words in the report), qualified opinion, disclaimer of opinion, and adverse opinion. Among the five categories of audit opinions, unqualified and modified unqualified opinions are classified as "positive opinions" that indicate that the company is well operated. Qualified, disclaimer, and reverse opinions are generally classified as "negative opinions" that indicate that the company has some problems in its operation. This study uses the 1999 to 2008semiannual and annual audit reports of companies listed on the Taiwan Stock Exchange Corporation (TWSE) and the Gre Tai Securities Market (OTC) as a research database. In Table 1 Panel A, we find that 20.73 percent of semiannual reports were issued unqualified opinions by auditors, and 62.24 percent were issued qualified opinions.

For annual reports, auditors issued 36.13 percent unqualified opinions, 63.06 percent modified unqualified opinions, and only 0.81 percent qualified opinions. This result shows a shift in audit opinions between semiannual and annual financial reports, as unqualified audit opinions increased from 20.73 percent on semiannual reports to 36.13 percent on annual reports, and qualified opinions dramatically decreased from 62.24 percent on semiannual reports to 0.81 percent on annual reports. It appears that auditors often changed their "negative" opinions in semiannual reports to "positive" opinions in annual reports. The study will explore the factors that led to these changes of opinion. Evidence from the U.S. suggests that, after Enron, auditors' behavior became more conservative in regard to bankrupt companies (Geiger, Raghunandan and Rama, 2005; Fargher and Jiang, 2008). Francis and Yu (2009) found that larger audit offices provide higher-quality audits and those clients of larger audit offices evidence less aggressive earnings management. Prior studies have also reported that an auditor's having an industry specialization results in higher-quality audits (Balsam, Krishnan and Yang, 2003; Velury, 2003; Carcello and Nagy, 2004; Reichelt and Wang, 2010).

We explore the reasons for auditors' changes of opinion by asking whether the change is caused by the economic dependence of auditor from their clients. We also examine whether the auditor's industry specialty can reduce the incidence of changed opinions between semiannual and annual reports. …

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