Earning Manipulation, Independent Audit Quality And Audit Opinion Modification

Independent audit quality has attracted the attention of investors and policy makers. Researchers has shown that China listed companies manage their earnings to meet the criterion of trading rights or rights offer. Whether CPAs obey the policies of audit regulations is an important indicator of audit quality. This paper studies the relationship between earnings management and modified audit opinions using the data from China A share companies (200-2002). We classified audit opinions into Standard unqualified opinion group and modified opinions group. Using uni-variable analysis and multi-variable logistic regression, we found that when public companies barely get even or make large losses, the probabilities that they get modified opinions increase, which indicate that CPAs in China have showed some expertise in their works. However, when ROE barely meet the criterion to rights offering, the probabilities that public companies get modified opinions show no difference to areas where managers have no incentive to manage earnings. The facts indicate that there are still rooms for CPAs to improve. This paper also discusses the issue of Audit Opinion Modification which gains more and more attention from investors and regulators recently. Using descriptive statistics and multi-variable logistic regression analysis, we found that (1) CPAs tend to switch the opinions from qualified opinions to unqualified opinion with explanatory paragraph; (2) CPAs tend to issue qualified opinions when companies suffer large losses. My research also found CPAs shows very strong consistency in their opinions. To some extent, this shows that CPAs will be more independent when they face high risk or when the price to say no is relatively low.