Why press coverage of a client influences the audit opinion: Exploring strategic and cognitive influences in the decision process

This dissertation examines why auditors are more likely to issue going-concern modified opinions to clients when there is press coverage of a negative event that was previously known to the auditors. A recent archival study found that negative press coverage of an audit client increased the likelihood that auditors would modify their opinion. That result was puzzling because it was also observed that press coverage did not increase the client's probability of bankruptcy (the associated economic event). Similarly, another study found that although press coverage of the client's loss contingency did not have a negative impact on the company's cumulative abnormal returns, it nonetheless led to more conservative audit reporting.;Accounting researchers suggested the reason auditors modified their opinions more often was because press coverage led auditors to anticipate increased litigation. As a strategic response, auditors then issued modified opinions to limit their legal liability. However, research in behavioral decision theory suggests that the tendency to modify the audit opinion when there is redundant press coverage may be due to auditors making inadequate adjustment for data redundancy. The primary goal of this study is to empirically test whether both or one of the two alternative explanations (strategic versus cognitive) explains auditors' increased likelihood to issue modified opinions in the presence of press coverage.;In a laboratory setting, I manipulate press coverage while holding the client's debt status information and probability of bankruptcy constant in order to disentangle the strategic and cognitive effects. A secondary goal of the study was to replicate the archival finding in the laboratory setting where I could ensure that the information disclosed through press coverage was strictly redundant (i.e., presented no new information).;Consistent with the archival findings, the audit opinion was influenced by redundant press coverage. The results suggest that auditors were unable to adjust adequately for data redundancy in press coverage. That is, both the audit opinion and auditors' going-concern judgments were influenced by press coverage. If auditors were being strategic, only their audit opinion should have been affected. In addition, press coverage did not have a significant impact on perceived audit litigation risk.