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Audit
Audit qualifications and qualifications
corporate governance in
Spanish listed firms
725
Juan Pedro Sánchez Ballesta and Emma Garcı́a-Meca
Accounting and Finance Department, University of Murcia, Murcia, Spain

Abstract
Purpose – Corporate governance empirical studies have primarily focused on the effects of corporate
characteristics on market value, discretionary accruals, voluntary disclosure and firm performance.
Nevertheless, corporate governance characteristics and the legal system of investor protection may
also influence the role of statutory auditors and the demand for audit quality. The aim of this study is
to investigate the corporate governance role of external audits in the Spanish capital market context.
Design/methodology/approach – This article measures this question by considering the conflicts
of interests between managers and shareholders analysed in the agency theory. This article uses a
logistic regression using a matched pair design, developed with the dependent variable indicating
whether the firm receives a qualified opinion, and the independent variables representing ownership
concentration, board ownership, board size and family members on the board. Empirical support for
this study is gathered from a sample of Spanish listed firms during the period 1999-2002.
Findings – The results support that higher insider ownership provides better corporate governance
structure leading to higher quality of financial reporting and, therefore, less likelihood of receiving
qualified audit reports. On the other hand, the presence of family members on the board increases the
possibility of obtaining a qualified report.
Originality/value – This study focuses explicitly on the end result of the audit decision process: the
presence or absence of a qualification, which is the central concern of the financial statement user.
Keywords Qualifications, Corporate governance, Capital markets, Auditing
Paper type Research paper

1. Introduction
Corporate governance is defined as the system by which firms are directed and
controlled (Cadbury, 1992). It affects the development and functioning of capital
markets and exerts a strong influence on resource allocation due to it reduces
shareholders’ monitoring and auditing costs.
Previous studies have primarily focused on the effects of corporate ownership on
market value, discretionary accruals, voluntary disclosure and firm performance.
Nevertheless, corporate governance characteristics and the legal system of investor
protection may also influence the role of statutory auditors and the demand for audit
quality (Piot, 2001, p. 466). SAS no. 55, consideration of the internal control structure in
a financial statement audit (AICPA, 1988) places into the authoritative auditing
literature the implied assertion that corporate governance characteristics, in particular
the board of directors, are expected to have a significant relation with the quality of Managerial Auditing Journal
Vol. 20 No. 7, 2005
financial reporting practices. As summarised in De Fond (1992), previous research has pp. 725-738
shown that the demand for audit quality is a function of the agency conflict caused by q Emerald Group Publishing Limited
0268-6902
the disparity between management and ownership incentives. DOI 10.1108/02686900510611258
MAJ In this study we focus explicitly on the end result of the audit decision process: the
20,7 presence or absence of a qualification, which is the central concern of the financial
statement user. The difficulty of the qualified report decision may render the auditor
susceptible to management pressure. A good corporate governance structure could
help the auditor mitigate such pressure, so that we expect that under certain
governance characteristics auditors are more likely to mitigate any management
726 pressure to issue a clean opinion.
The aim of this study is to investigate the corporate governance role of external
audits in the Spanish capital market context. Some prior studies (Chang and Walter,
1996; Chen et al., 2001) have investigated whether well-governed firms receive more
non-qualified audit reports than the rest. We incorporate the implications of these
studies and add new corporate governance variables to explain the probability to
receive an audit qualification report. We measure this question by considering the
conflicts of interests between managers and shareholders analysed in the agency
theory.
Theoretical and empirical literature usually considers concentration of ownership
and insider ownership as the main corporate governance mechanisms. The board also
plays an important role in the corporate framework due to it is mainly responsible for
monitoring managerial performance and achieving an adequate return for
shareholders. In this sense, we estimate a logistic regression using a matched pair
design of 32 firm-years observations with qualified audit opinions and 32 firm-year
observations with unqualified audit opinions (control sample). The model includes as
independent variables ownership concentration, board ownership, board size and
owner identity. The results support that insider ownership is an effective monitoring
device that leads to higher quality of financial reporting and therefore, less likelihood
of receiving qualified audit reports. On the other hand, the presence of family members
on the board increases the likelihood to obtain a qualified report, which can be
explained because of the lower costs of an adverse opinion in these firms.
There is still little research about the determinants of audit qualifications in the
Spanish capital market. As La Porta et al. (1998) point out, most studies on corporate
governance focus on one or a few wealthy economies such as the US, Germany or
Japan. It is widely admitted, however, that idiosyncratic and institutional
characteristics advise caution in the generalisation of results. This investigation
offers new insights into the relationship between corporate governance and audit
qualification by using data from Spanish listed firms, a continental country
characterised by family and concentrated ownership, low legal protection of investors
and pyramidal groups and board of directors not totally independent of managers. In
addition, the Spanish audit market has different characteristics to the typical audit
markets of Anglo-Saxon countries, from which most of the existing empirical audit
literature originates.
According to Dopuch et al. (1987), this kind of research is useful to identify clients
that are likely to receive qualified opinions or to screen potential clients. Moreover, this
work may be of interest to market regulators, institutional bodies and large audit firms.
An understanding of the factors associated with audit qualification could act as an aid
to the auditor’s assessment of the engagement risk including the planning process. The
findings are also pertinent given the concerns over the regulation and quality of Audit
auditing services. qualifications
The paper is organised as follows: in section 2 it is provided an analytical
framework regarding the Spanish audit market and section 3 provides previous
empirical evidence on the factors that influence audit opinions. Next, we detail the
methodology used and describe the sample and variable measures used in the
empirical analysis. Section 5 summarises the principal findings and, finally, we finish 727
with the conclusions and implications of the results.

2. Corporate governance and audit market in Spain

Spain, as most of the corporate system countries, is classified as a French-origin civil
law country by La Porta et al. (1997). It is characterised by the presence of a few large
dominant shareholders who may exert a strong influence on management, weak
investor protection and low developed capital markets. In Spain there is a long
tradition of state dirigisme and coordination of the economy, a capital market centred
around banks and financial institutions, a concentrated capital ownership and a stable
hard cores of shareholders. Managers are accustomed to having close relationships
with the legislative power and little oversight by the board of directors or shareholder’s
meetings (Aldama Report, 2002).
The lack of legal protection and the lower development of capital markets
explain why Spain exhibits larger levels of ownership concentration as compared to
common law countries, and even to Germany and Japan (De Miguel et al., 2003).
According to Grant and Kierchmaier (2004), in Spain the dominant form of
ownership is legal control, that is, one or a group of shareholders that control over
50 per cent of the votes at the annual general meeting. Fundamental stakeholders in
the Spanish corporations are families, banks and industrial firms, which have a
main role in the ownership structure that influences its corporate governance. Until
recently, state ownership has been quite relevant in a number of large Spanish firms
(mainly involved in oil, tobacco, energy and telecommunication services). After a
strong privatisation process, such participation has almost disappeared and the
state has been replaced by other investors, most of the time banks (Crespı́-Cladera
and Garcı́a-Cestona, 2000). As De Miguel et al. (2003) reveal, in Spain the banking
sector is of great importance, and the capital market plays a secondary role in the
financing of Spanish firms. Nevertheless, their role is not so prevalent as in other
countries such as Germany or Japan.
Most large- and medium-sized Spanish companies are organised as pyramidal
groups with a holding company at the top controlling one or more subsidiaries.
Consequently, indirect ownership becomes a device used by companies and
individuals to exert voting power beyond the direct ownership. The members of the
board mainly represent the controlling shareholders, whereas minority shareholders
are not well represented. As a result, the main agency problem arises from controlling
and minority shareholders. Regarding the role played by board of directors, in Spain
they do not exercise complete control and are not totally independent of management
(Alvarez et al., 1999).
In relation to the audit market, Spain has a relatively new statutory audit market,
due to audits are compulsory for all medium and large companies only since the 1988
MAJ Spanish Audit Law (SAL). The objective of this law was to improve the transparency
20,7 in the firm’s accounts and to improve the comparability with other European firms.
The oldest Spanish professional association of auditors is El Instituto de Censores
Jurados de Cuentas, which is still in operation. The SAL implemented the provisions of
the European Union’s eighth directive into Spanish law and constituted the earliest
legislation in the country’s history that comprehensively focused on the audit
728 profession (Carrera et al., 2001). Since the SAL, the large multinational audit firms have
become a dominant force in the Spanish audit market (Moizer et al., 2002).
Nevertheless, these firms maintain aggressive client-capture policies, since in 1997
changes in Spanish audit legislation reduced considerably (by around 20 per cent) the
number of audited companies (Garcı́a-Benau et al., 1999).
In this context, where there are not market-based institutional incentives, such as
reputation loss and litigation costs, there are no policies to reduce manager influence
over auditor decisions (Garcı́a-Benau et al., 2004). This situation, along with the lack of
a cohesive professional audit infrastructure, led to disincentives to issue qualified
opinions in the Spanish market.
All these Spanish audit market and corporate governance characteristics justify the
relevance of the study of the relationships between auditor opinions and corporate
governance.

3. Previous literature
Since 1960, and particularly over the last years, accounting researchers have become
interested in empirically examining the explanatory factors and consequences of
auditor qualifications.
In relation to the consequences, a number of costs may be imposed upon firms
following a qualified audit opinion. Some research have showed the effect of audit
opinion on capital market (Firth, 1978), manager’s compensation (Chow and Rice,
1982) or additional costs of auditing (Witthred, 1980). Chow and Rice (1982),
Mutchler (1984), and Craswell (1988) also found a relationship between qualified
audit reports and auditor switching, although this was not supported by Schwartz
and Menon (1985).
Regarding the explanatory factors of these audit decisions, Gosman (1973)
observed that certain company characteristics appeared to be closely associated
with the receipt of qualifications by 100 Fortune 500 firms during the 1959-1968
period. Although no significant industry classification differences were found, he
showed that larger firms were significantly more likely to have received at least one
qualification. Later, Dopuch et al. (1987) provided evidence that a probit model using
publicly available financial and market data predicts whether an auditor will issue a
first-time qualified opinion in the current year, or another qualified opinion in the
subsequent year. Their results showed that market variables included in the model
have explanatory power beyond that contained in the financial statement variables
in the model.
In the line of this paper, some studies have examined the influence of corporate
governance variables in the likelihood that a firm obtains an audit qualification.
Keasey et al. (1988) examined in UK the extent to which a number of variables are able
to explain the receipt of a “small audit qualification”. The main empirical findings
showed that companies audited by large audit practices, firms which had a prior year Audit
qualification, a secured loan, declining earnings, large audit lags and few non-director qualifications
shareholders were more likely to receive an audit qualification than other companies.
Citron and Taffler (1992) analysed a large sample of UK quoted companies over the
decade 1977-1986, investigating whether the presence or absence of a going concern
qualification is associated with some variables such as the likelihood of company
failure or audit firm size. They found a positive relationship between the objective 729
likelihood of company failure and the probability of a going concern opinion, although
it only happens when the probability of failure is very high. In addition, the findings
showed that smaller UK audit firms do not appear to exhibit lower going concern
opinion rates than do large firms.
In Singapore, Chang and Walter (1996) found that firms receiving audit
qualifications are smaller, less profitable and liquid, and have higher debt than
firms with unqualified audit reports. Their results also showed that it is more likely
that a qualified report will be issued to a firm that has a higher proportion of equity
owned by the management, due to the potential cost of an adverse opinion falls in
accounting reports prepared by managers and directed to owner-management. In
China, Chen et al. (2001) found that the probability of receiving audit qualifications
decreases with increased management ownership and overseas holdings. Gul et al.
(2001) examined the linkages between CEO board dominance in family owned
companies and the likelihood that firms receive audit qualifications. Their results
showed that dominant CEOs in family owned firms are more likely to act in the
interests of the firms and prepare financial statements that are less likely to attract
audit qualifications. Beasley and Petroni (1998) also find that the likelihood of an
insurer employing a brand name auditor that specialises in the insurance industry
increases with the percentage of the members of the board of directors that are
considered outsiders.
In Spain, Sánchez Segura and Sierra Molina (2001) analysed the relationship
between the likelihood of qualified audit reports and certain corporate characteristics.
The empirical evidence showed that losses are the most important explanatory factor
for the existence of qualifications. Firm size, industry, auditor and negative
extraordinary earnings also appeared to have explanatory power.

4. Research methodology
The aim of this paper is to analyse the ownership and board structure of all Spanish
non-financial listed companies in the Madrid Stock Exchange during 1999-2002,
underlying the effects on audit opinions. In particular, we investigate whether
audit qualifications are influenced by ownership concentration and board
ownership. Since the theory argues that several different types of owners have
different roles to play when ownership is separated from control, we also study the
influence of family members on audit reports. In addition, we have tested the
possibility that companies with an small board will be unlikely to have formalised
accounting and management control systems. Specifically, our hypotheses are the
following:
MAJ H1. Firms with concentrated ownership are less likely to receive an audit
20,7 qualification. The discretionary power of managers over the accounting
policy is important in firms with diffused ownership, while in more
concentrated companies large block-holders can exert a more effective
monitoring task on management.

730 H2. Firms with a large proportion of insider ownership are less likely to receive an
audit qualification. According to Jensen and Meckling (1976), divergences of
interests and opportunistic behaviours are inversely related to the insiders’
ownership fraction, since insider ownership acts as a monitoring device that
leads to higher quality of financial reporting and, therefore, less likelihood of
receiving audit qualifications.
H3. Firms with family members on the board are more likely to receive an audit
qualification, due to the lower costs of an adverse opinion in these firms.
H4. The likelihood that a company receives an audit qualification is influenced by
the size of the board.
In the corporate governance literature board size is considered an important
mechanism for monitoring management. However, there exist no a general agreement
about its effect. One the one hand, Jensen (1993) affirms that board’s capacity for
monitoring increases with board size, leading to higher quality of financial reporting;
but on the other hand, large board sizes can also be associated to a reduction of the
ability to communicate, coordinate and monitor, resulting in a board less likely to
function effectively and, consequently, a worse quality of financial reporting. Thus, we
make no prediction on the sign of this relationship.

4.1 Sample
Our sample is drawn from the population of Spanish firms listed on the Madrid
Stock Exchange over the period 1999-2002. We exclude financial companies, because
of the specific characteristics of their financial ratios. The principal sources are the
SABI database (Sistema de Análisis de Balances Ibéricos – System of Iberian
Financial Statement Analysis), made by Bureau Van Dijk, and the database from
the CNMV (Spanish Security and Stock Commission), which provides information
on all shareholders with ownership of at least 5 percent, as well as director’s
ownership of listed firms. This cut-off point is mainly driven by the disclosure
regulation in countries such as France and Germany and has been also used in
previous studies. From this population we initially included in the sample all the
companies with at least one audit qualification in the period 1999-2002. In order to
achieve independence between observations, for those companies with more than
one audit qualification in the period, only the financial year corresponding to the
first time qualification was considered. This process yielded 32 independent
firm-year observations.
Then, each firm year of the test sample was matched with a control firm with an
unqualified report in the event year. For the control sample we considered as
candidates the Spanish firms listed on the Madrid Stock Exchange over the period
1999-2002 and not included in the test sample, i.e. the companies with unqualified audit
opinions in the period. The selection of the control sample (matched pair design) was Audit
made using the following criteria: qualifications
. fiscal year;
.
industry, according to the classification of CNMV; and
. nearest total sales amount.
731
To keep independence, once a control firm had been matched in a particular year to its
corresponding firm in the test sample, we did not allow it to be matched again with
another firm in another year.

4.2 Model and variables

The general model used to determine which factors influence the receipt of an audit
qualification is as follows:

AO ¼ b0 þ b1 Block þ b2 Family þ b3 Ins_own þ b4 Board_size þ b5 Prof

þ b6 L_Sales þ b7 Lev þ b8 Liquidity þ 1

where the dependent variable is audit opinion, which may be unqualified or qualified.
An unqualified opinion is one that states the financial statements to which it relates
give a true and fair view of the client’s financial affairs. The variable takes the value of
1 if the opinion is qualified and 0 otherwise.
The independent variables included in the model are described below and
summarised in Table I:
.
Block: it is the proportion of common shares held by significant shareholders.
Significant shareholders have to disclose their firm ownership to the Spanish
Security and Stock Commission when this ownership is equal or greater than 5
per cent. According to McConnell and Servaes (1990) large block-holders can
exert work as an effective device for monitoring management.

Explanatory variable Description Expected sign

Pro Operating income before interests and taxes over 2

total assets (ROA)
Lev Long-term debt/total assets þ
L_Sales Natural logarithm of annual sales revenue 2
Board_Size Number of directors of the board ?
Family Dummy variable (it takes the value of one if there are þ
family members on board)
Block Proportion of common shares held by significant 2
shareholders (. 5 per cent)
Ins_own Proportion of common shares held by members of 2 Table I.
the board of directors The independent
Liquidity Current assets to current liabilities 2 variables
MAJ .
Ins_own: it is the proportion of common shares held by members of the board of
20,7 directors.
.
Family: is a dummy variable that takes the value of one if there are family
members on the board.
.
Board_size: it is the number of directors of the board.
732 We control for variables other than governance, which may affect audit opinions.
L_Sales is the natural logarithm of annual sales revenue. Size has been included due to
it is likely that larger companies will have more formal and developed internal
financial control systems and will, therefore, be less likely to receive a qualification. In
addition, large companies may be less likely to fail, and auditors may hesitate to issue a
qualified opinion due to a concern about losing the significant fees that large clients
generate. Nevertheless, according to Keasey et al. (1988), the larger the firm is, the
higher the probability to receive a qualification because of its greater public visibility.
DeAngelo (1981) finds that the probability that an auditor finds and report a breach in
the accounting system increases with audit firm size because larger audit firms have
more to lose from an alleged failure to detect and report a material misstatement of
earnings. Lev is defined as long-term debt over total assets, which controls for any
possible leverage effect. A positive relationship with audit qualification is expected due
to this is a proxy of company risk. According to Chang and Walter (1996), as the
financial risk of the firm increases, auditors have incentives to be more vigilant in their
duties. In this context it is more likely that audit procedures will be more accurate, and
that client accounting and reporting errors on breaches will be discovered. Prof,
defined as operating income before interests and taxes over total assets, is the measure
of firm performance, and as a proxy for liquidity we consider the current assets to
current liabilities ratio. According to previous literature we expect a negative
relationship between audit qualifications and both variables because, from the auditor
perspective, lower ratios mean a higher probability of corporate failure. In addition,
riskier clients are likely to be reviewed more thoroughly, and thus it is more likely that
auditors will qualify to avoid litigation losses (Nelson et al., 1988).
All these control variables capture most of those characteristics that seem relevant
to explaining the receipt of an audit qualification and for which data are available.
The descriptive statistics of the total sample of 64 firm-years observations comprising
the 32 qualified firm-years and the control sample are shown in Table II. The mean board

Minimum Maximum Mean Std. dev. Skewness Kurtosis

Prof 20.106 0.243 0.068 0.059 20.731 2.376

Lev 0.000 0.697 0.225 0.163 0.778 0.297
L_Sales 6.589 17.594 12.771 1.871 20.215 1.625
Board_Size 3.000 26.000 11.689 4.884 0.620 0.083
Family 0.000 1.000 0.295 0.460 0.921 21.191
Insider_own 0.000 0.983 0.186 0.250 1.284 0.696
Table II. Block 0.000 0.950 0.580 0.235 20.455 20.263
The descriptive statistics Liquidity 0.419 6.694 1.498 0.997 2.955 12.161
size of the Spanish firms listed on the Madrid Stock Exchange is 11.69, quite similar to that Audit
obtain for Yermarck (1996) for US (12.25). However, the average proportion of shares held qualifications
by significant shareholders is 58.0 per cent, which shows the high degree of ownership
concentration in Spain in comparison to other countries. For example, in other corporate
governance studies, Faccio and Lasfer (1999) report for the UK a block value of 34.57 per
cent, calculated as the proportion of shares held by those shareholders that hold a stake of
or above 3 per cent. Therefore, even including in the UK definition more owners, the 733
concentration in Spain is much higher than in the UK or in those countries characterised
by widely dispersed shareholders. In the same way, the proportion of shares held by
directors shows in our sample a mean of 18.6 per cent, also higher than the values reported
for studies such as Morck et al. (1988) and Cho (1998) for US (10.6 and 12.14, respectively)
or Short and Keasey (1999) and Faccio and Lasfer (1999) for UK (13.3 and 16.7,
respectively); but, on the other hand, similar to that of De Miguel et al. (2001) for Spain
(17.7). Relating the control variables, the mean long-term debt to total assets is of 22.5 per
cent, while the ROA is of 6.8 per cent and the mean current assets to current liabilities is of
1.50, values that, overall, seem to be indicative that the average firm listed in the Madrid
Stock Exchange has a healthy financial situation and is far from suffer a risk of corporate
failure.
Given the nature of the dependent variable, and the presence of dichotomous and
continuous independent variables, with the purpose of analysing the effect of these
variables on the likelihood of receiving an audit qualification, first we conduct an
univariate analysis. The univariate results will be based, where appropriate, upon
chi-square tests from contingency tables, t-tests and Mann-Whitney U-tests. After this
first approximation to the importance of each explanatory variable to discriminate
between firms with qualified or unqualified audit opinions, we will use the logistic
regression as the most suitable multivariate estimating instrument.

5. Results
5.1 Univariate analysis
The results of the univariate analysis are shown in Table III. Normality was tested
through the Kolmogorov-Smirnov test. In most cases, normality cannot be rejected at a

Z Kolmogorov-
Mean Smirnov
Pearson
AO ¼ 0 AO ¼ 1 AO ¼ 0 AO ¼ 1 t M-W Chi-square

Prof 0.086 0.050 0.989 1.145 2.562 * *

Lev 0.189 0.262 0.719 0.653 21.847 *
L_Sales 12.870 12.673 0.570 0.637 0.419
Board_Size 11.226 12.167 0.879 0.677 20.749
Family 0.188 0.414 3.745 *
Insider_own 0.229 0.139 1.165 1.708 * * * 21.350
Block 0.555 0.604 0.598 0.572 20.845
Table III.
Liquidity 1.678 1.319 1.448 * * 0.982 21.947 *
The results of the
Notes: *p , 0.1; * *p , 0.05; * * *p , 0.01 univariate analysis
MAJ significance level of 10 per cent, so the t-test was used to evaluate the mean differences
20,7 between the sample of firms receiving audit qualifications and the control sample. In
those cases where normality was rejected in one of the groups (insider ownership and
liquidity), Mann-Whitney U-test was undertaken. The association between the
dichotomous explanatory variable family and audit opinion was evaluated with the
Pearson Chi-square from contingency tables.
734 As expected, firms receiving audit qualifications have significantly higher
long-term debt to total assets ratios (p , 0:1) and significantly lower profitability
(p , 0:05) than the control firms. Moreover, the liquidity is also significantly lower in
the firms with qualified opinions. The discriminant power of these three ratios give
evidence of the fact that financial problems (higher financial risk associated to high
long-term debt to assets, higher probability of corporate failure associated to low
profitability and liquidity) are one of the main sources of qualified opinions. With
respect to size (natural log of sales) there is no difference between the test and control
groups, as we have used this variable in our matching procedure. On the other hand,
from the corporate governance variables, the chi-square test indicates that the
proportion of qualified reports is significantly higher (p , 0:1) in firms with several
members of the same family on the board. Regarding to the other variables, the level of
insider ownership is higher in firms with a clean report; however, the difference is not
significant at conventional levels. And relating to board size and ownership
concentration, there are no significant differences between the two groups.

5.2 Multivariate analysis

The results for the multivariate logistic regression are reported in Table IV. The
insider ownership coefficient is significant (p , 0:05) and with negative sign,
supporting that, in Spanish firms, the likelihood to receive and audit qualification
decreases as insider ownership increases. The results show that any increase in insider

Expected sign Estimated coefficients Standard errors Wald

C 5.334 3.359 2.521

Block 2 1.755 1.525 1.325
Family þ 2.282 0.917 6.191 *
Ins_own 2 24.041 1.903 4.51 *
Board_Size ? 0.144 0.094 2.314
Prof 2 217.889 8.786 4.146 *
L_Sales 2 20.414 0.257 2.599
Lev þ 20.012 2.411 0.000
Liquidity 2 20.982 0.423 5.402 *

Model Chi-square 24.016

p-value 0.002
Pseudo R2 Cox-Snell 0.334
Table IV.
Correct predictions (%) 72.9
The results for the
multivariate logistic Notes: * p , 0.05; AO ¼ b0 þ b1 Block þ b2 Family þ b3 Ins_own þ b4 Board_size þ b5 Prof þ
regression b6 L_Sales þ b7 Lev þ b8 Liquidity þ 1
ownership aligns the interests of managers and shareholders, leading to a better Audit
monitoring of management and thereby obtaining clean reports. Indeed, acquiring qualifications
more ownership give directors more power and control over the auditing process,
decreasing the probability to obtain a qualified audit report. Dominant directors may
exert more pressure on auditors to issue clean opinions compared to boards where
control is exercised democratically. These results are in line with previous empirical
evidence (Keasey et al., 1988; Chen et al., 2001). 735
On the other hand, firms with members of the same family on the board are more
likely to receive an audit qualification. One explanation of this relationship is that the
costs of receiving an adverse opinion are lower in these firms, where the probability of
shareholders taking punitive action decreases as the family influence increases. In
addition, the presence of family members on the board can result in higher liquidity for
these firms, which allows them to undertake more marginally acceptable investments
lowering their average profitability and increasing the likelihood of qualifications (Esta
Argumentación Después Y En Letra Pequeña Porque En Nuestro Caso No Existe Esa
Correlación, Al Menos Significativamente).
According to our previous expectations, the likelihood of receiving an audit
qualification decreases as profitability and liquidity increase. That is, profitable and
liquid firms are more likely to receive clean reports, which is consistent with the
proposition that audit qualifications occur more frequently in firms with financial
problems and when economic conditions worsen. On the other hand, neither leverage,
board size, firm size or ownership concentration result significant. Summarising, the
most important corporate governance variable influencing audit opinion is Family,
whereas on the effect of insider ownership we must be more cautious, since in the
univariate analysis this variable was not significant. On the other hand, neither Block
or Board_Size significantly influence the likelihood of receiving an audit qualification.
As for the control variables, our findings corroborate that the lack of liquidity and
profitability, associated both to the probability of corporate failure, are the main
financial characteristics leading to a qualified opinion. Leverage, although significant
in the univariate analysis, loses this significance when interacting with liquidity.

6. Conclusions
Despite the prominent attention recently given to the role of corporate governance in
firm performance, little research has been conducted investigating its relation to the
audit opinion, as a proxy of the quality of corporate financial reporting.
This paper, using a logistic regression with a matched pair design, presents
empirical evidence that such a relation exists. The results presented upon Spanish
firms over the period 1999-2002 indicate that the distribution of qualifications is far
from random. In fact, there appear audit qualifications to become more common among
companies with specific governance characteristics. The most significant findings are
that the probability to obtain a clean audit report is related to the insider ownership
and the presence of family members on the board. The results are consistent with the
theory that states that when the managers are owners they act in the interest of the
firm and prepare financial statements that are less likely to attract audit qualifications.
These findings support the notion that higher insider ownership provides better
MAJ corporate governance structure leading to higher quality of financial reporting and
20,7 therefore, less likelihood of receiving qualified audit reports.
On the other hand, the presence of family members on the board increases the
possibility to obtain a qualified report. One explanation, based on agency theory,
suggests that family dominance is expected to be associated with lower levels of board
independence and higher agency costs, including lower levels of corporate
736 transparency. Other explanations posit that in these firms the boards are less likely
to pressure the auditors to issue a clean report because the costs of receiving an
adverse opinion are lower, as the probability of shareholders taking punitive action
decreases as the family influence increases. Confirming previous empirical results,
Spanish firms receiving audit qualifications have lower profitability and liquidity
ratios.
These findings corroborate the present concern over the role of corporate
governance in the financial reporting process. Additional research could extend the
results to other measures of corporate governance including the composition of the
audit committee or the independence level of their directors.

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Further reading
Bartov, E., Ferdinand, A.G. and Tsui, J.S.L. (2001), “Discretionary-accruals models and audit
qualifications”, Journal of Accounting and Economics, Vol. 30, pp. 421-52.
Bell, T.B. and Tabor, R.H. (1991), “Empirical analysis of audit uncertainty qualifications”,
Journal of Accounting Research, Vol. 29 No. 2, pp. 350-70.
Carcello, J.V. and Neal, T.L. (2000), “Audit committee composition and auditor reporting”,
The Accounting Review, Vol. 75 No. 4, pp. 453-67.