Mehdi Moradi Mahdi Salehi
The Effect of Qualified Audit Report on Share Prices and Returns: Evidence of Iran
Assistant Professor of Accounting Department, Ferdowsi University of Mashhad, Iran Assistant Professor of Accounting Department, Guilan University, Iran
Mehrollah Rigi & Mohsen Moeinizade
M.A Student in Accountancy, Ferdowsi University of Mashhad
Audit report is the consequence of auditing process and it is a major instrument of communication between auditor and financial statements' user. This study attempts to examine the correlation between qualified audit report and share prices and returns in order to test information content of qualified audit report. A market-based study conducted on the qualified audit reports of the shareholding companies in Iran during the period 2004-2008. The changes in share prices and returns during the test period which represents one week before and as well one week after the announcement's data were measured and analyzed. The result of the survey indicated that qualified audit opinion has no significant effect on share prices and returns. In other word, there is no information content in qualified audit opinion in Iran. This conclusion may suggest that the audit report's users' do not understand its meaning or appreciate its value. Keywords: Qualified auditors' opinions, Information content, Shares' prices and returns, Share prices, and Tehran Stock Exchange.
Audit report is a media of communication between auditor and financial statements' users; it shows the most important part of auditors' activity and expresses the result of financial statements' assessment to users (Salehi and Abedini, 2008). A considerable reason for demanding auditing is expected effects on decision making, and demanding for audit services is generated by many causes like (1) the expecting gap between the financial statements' users and preparers (Salehi and Nanjegowda 2006; Salehi, 2007; Salehi and Azary, 2008; and Salehi and Rostami, 2009); (2) the conflict of interest between kinds of financial statements' users (Salehi, 2008); (3) the complicated economic environment (Salehi, Mansoury, and Pirayesh, 2008); and (4) effects of the financial statements on decision making (Salehi, Mansoury, and Azary, 2008). If the audit report is objective and comprehensible, it can be a communicative media between the auditor and the audit reports' users, and because of its relevance it can make difference in decision making, otherwise, the users of the financial statements will not use the
report in the decision-making process (Thuneibat, Khamees, and Al-Fayoumi, 2007; Salehi, 2009). If the financial statements' users do not understand the effect of audit reports, auditing is not valuable, however, the prospected effect of the auditor's report is not obvious due to inconclusive previous studies. This means that it is important to conduct a survey of information content in situations and environments.
Research Problem and Research Question
Skepticism for auditing process and value of audit report motivated to conducting study. Since the auditing is mandatory, researchers have debated over its importance and necessity. Nowadays, there is a wide criticism of the audit profession within the context of business and audit failures; the value of the audit report continues to be scrutinized. This study tries to answer the following questions: Does the audit report in Tehran Stock Exchange (TSE) have information content? Or do financial statements' users emphasize auditing result as an information source
In other words, is audit report (especially qualified opinion) relevance for decision making? provided by the studies which have been undertaken in the area of audit reporting have been opposing and inconsistent. Most of these studies have been classified into "market based" and "experimental studies" (Craswell, 1985). This section of the study will concentrate on those...