Auditing Financially Distressed Firms: Evidence from Germany

• In Event: Continental Breakfast and Research & Education Forum
  In Roundtable Session: Table 3: Going Concern Opinions and Financially Distressed Firms

Abstract

This paper sheds light on auditing in financially distressed firms in the German legal setting. The paper asks, first, whether auditors are chosen strategically in situations of financial distress and, second, whether the outcomes of auditing distressed firms vary with auditor type. Based on a sample of German listed firms with matched subsamples of distressed and un-distressed firms, we find only weak evidence that financially distressed firms choose their auditors strategically. But with regard to audit quality, auditor type seems to matter: Our evidence sug-gests that the accruals quality of financially distressed firms is higher when being a client of a Big 4 auditor. This finding is complemented by evidence that risk re-porting is more informative for clients of Big 4 auditors and that the Big 4 de-mand higher audit fees in situations of financial distress, being in line with the signaling explanation of auditor choice.

Authors

• Joerg R. Werner, Frankfurt School of Finance & Management

• Hanno Dachwitz, Frankfurt School of Finance & Management