Abstract

This study empirically examines the difference in accounting conservatism among firms with different audit opinions to understand whether the external auditors consider accounting conservatism in forming their audit opinion on the financial statements. To do so, we compare the strength of conservatism between the financial statements with unqualified opinions and those with the other types of audit opinions. We mainly use the firm-specific measure of conservatism ( C-score) recently developed by Khan and Watts(2009), and also use an alternative measure of conservatism suggested by Ball and Shivakumar(2005) to check the robustness of our findings. Using the sample of non-banking firms listed on both Korean Stock Exchange and KOSDAQ over the period 1999-2010 inclusive, we find that the conservatism of unqualified opinion firm/years is statistically stronger than that of the other opinion firm/year. On the other hand, when we compare the conservatism of unqualified opinion year with that of the other opinion year(just before unqualified opinion year) for the same firms, we fail to document that the conservatism of unqualified years is statistically stronger than that of the other opinion years, when using the measure of Khan and Watts(2009). As a robustness check, we use an alternative measure of conservatism measure suggested by Ball and Shivakumar(2005) and find qualitatively similar results. This paper may have an implication that the external auditors might consider accounting conservatism in forming their audit opinions. Accordingly, it can provide for regulatory bodies insights into more effective regulation of audit firms on the basis of conservatism and be used by the accounting firms as a reference for self quality control.

Keywords

• audit opinion
• accounting conservatism
• measure of accounting conservatism
• C-Score

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