Title: Are Spanish auditors effective in transmitting manipulation practices? An analysis of the ambiguity implicit in modified reports

Authors: Laura Arnedo, Fermin Lizarraga, Santiago Sanchez

Addresses: Business Department, Public University of Navarra, Campus Arrosadia s/n, 31106 Pamplona, Spain. ' Business Department, Public University of Navarra, Campus Arrosadia s/n, 31106 Pamplona, Spain. ' Business Department, Public University of Navarra, Campus Arrosadia s/n, 31106 Pamplona, Spain

Abstract: This study proposes auditors| effectiveness in the transmission (AET) of GAAP misstatements as a new measure of audit quality that is obtained from the audit report. We carry out a content analysis of the audit reports of a sample of 533 pre-bankrupt Spanish firms and find that the poorly enforced Spanish environment results in strategies of a lower than expected effectiveness in three aspects: the type of qualification chosen, the wording used and the adjustments proposed. We subsequently use AET to test for audit quality differences in three dimensions: auditor size, audit market experience and the client|s closeness to failure. Larger auditors are more effective in the transmission of the GAAP misstatements. We also find increasing audit quality throughout our 1990-2001 period of analysis and with the clients| closeness to failure. Our results constitute a reference for regulators, not only in Spain, but also in similar European code-law regimes where qualifications for GAAP violations are usually included in the audit reports.

Keywords: audit quality; audit report; bankruptcy; transmission effectiveness; GAAP misstatements; GAAP violations; independence; institutional environment; qualifications; Spain; manipulation practices; ambiguity; modified reports.

DOI: 10.1504/IJAAPE.2009.026627

International Journal of Accounting, Auditing and Performance Evaluation, 2009 Vol.5 No.3, pp.229 - 251

Published online: 21 Jun 2009 *

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