The predictive role of auditor going concern opinion and auditor characteristics in corporate bankruptcy : evidence from firms listed on the Egyptian stock exchange

Abstract EN

The primary objective of this study is to investigate the informativeness and the incremental predictive power of audit related disclosures of listed firms for corporate bankruptcy prediction beyond that of financial variables.

To attain this objective, several predictive models are constructed and compared using different types of explanatory variables: (1) auditor going concern opinion (auditor GCO), (2) auditor characteristics, and (3) standard financial ratios.

Using an imbalanced sample of 25 technically bankrupt firms and 50 healthy firms, logit models are constructed to examine the information content and the incremental predictive power of audit related disclosures beyond that of Altman (1986) financial ratios.

Several evaluation metrics are utilized including the Pseudo-R² statistic, AUC, Accuracy, Type I and Type II errors.

Results reveal that auditor GCO has significant predictive power for corporate bankruptcy; however, this predictive power is not incremental to a financial ratios-based model.

On the other hand, auditor characteristics; specifically, auditor type, auditor rotation, and auditor industry specialization, are not useful in predicting corporate bankruptcy.