Starling Insights Editorial Board
May 08, 2023
A recent study by researchers at the University of Kansas and Colorado State University found that audit partners who issued adverse opinions were more likely to be removed from continuing engagements, which can result in unfavorable changes to their client portfolios, lower fees, and less prestigious assignments.
To determine this, the researchers examined the auditor’s attestation of management’s internal control over financial reporting (ICFR) under Section 404(b) of the Sarbanes-Oxley Act of 2002. Section 404(b) requires that external auditors issue an adverse opinion when there is a material weakness in the client’s ICFR.
The study found that only about 6.7% of partners issued such opinions. Clients for whom these partners had worked were more likely to experience a change in the partner leading their account over the next year. Additionally, among all public clients, the study found that after issuing adverse opinions the accountants collected nearly $500,000 less in subsequent fees.
“Our results are consistent with audit partners experiencing negative consequences when they issue opinions that strain auditor-client relations, even though these opinions provide valuable information to capital market participants and are not likely to reflect lower audit quality.” the authors noted.
Join The Discussion