Predicting Auditors’ Opinions Using Financial Ratios and Non-Financial Metrics: Evidence from Iran.

Abstract

Purpose- The purpose of the paper is to investigate the extent to which a model based on financial and non-financial variables predicts auditors' decisions to issue qualified audit reports in the case of companies listed on the Tehran Stock Exchange (TSE). Design/methodology/approach- The authors utilized data from the financial statements of 96 Iranian firms as the sample over a period of five years (2012-2016). A total of 480 observations were analysed using a probit model through 11 primary financial ratios accompanying non-financial variables, including the type of audit firm, auditor turnover and corporate performance, which affect the issuance of audit reports. Findings- The results demonstrated high explanatory power of financial ratios and type of audit firm (the national audit organization vs. other local audit firms) in explaining qualifications through audit reports. The predictive accuracy of the estimated model is evaluated using a regression model for the probabilities of qualified and clean opinions. The model is reliable, with 72.9 percent accuracy in classifying the total sample correctly to explain changes in the auditor's opinion. Practical implications- The paper has practical implications and can assist auditors in identifying factors motivating audit report qualifications, mainly in emerging economies. Originality/value- The paper contributes to auditing research, since very little is known about the determinants of audit opinion in emerging markets including Iran; it also constitutes an addition to previous knowledge about audit opinion in the context of TSE. The paper is one of the rare studies predicting auditor opinions using both financial variables and non-financial metrics.