The endogenous relationship between audit-report type and business termination: evidence on private firms in a non-litigious environment

This study provides evidence on the relationship between audit-report type and subsequent business termination for private companies in a non-litigious environment. The results show that an endogenous relationship exists between bankruptcy and audit-report type, and between voluntary liquidation and audit-report type. A non-clean opinion is typically issued when firms face financial difficulties, which in turn become more severe after the receipt of a non-clean audit opinion. We find evidence that, even without a litigation deterrent in Belgium, financial performance has a similar impact on audit-report type as in litigious environments. We find that the self-fulfilling prophecy hypothesis holds for bankruptcy but not for voluntary liquidation. Our study also provides some evidence on audit reporting differences between Big 6 and non-Big 6 auditors in the Belgian audit market. When financial difficulties are obvious, as is the case when a company is about to go bankrupt, both Big 6 and non- Big 6 auditors are as competent and/or independent to assess and report going-concern problems. However, when financial difficulties are less apparent, as is the case for firms that voluntarily decide to liquidate, our results indicate that Big 6 auditors are more likely to issue a non-clean audit opinion than non-Big 6 auditors.