Effect of Audit Opinion on Stock Prices

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EuroEconomica
Issue 2(31)/2012 ISSN: 1582-8859 Effects of Audit Opinion on Stock Prices: The case of Croatia and Slovenia

Arbër H. HOTI Teaching Assistant
Faculty of Economics, University of Prishtina, arber_hoti@hotmail.com

Hysen Ismajli Associate Profesor
Faculty of Economics, University of Prishtina, hysen_rismajli@yahoo.com

Skender Ahmeti Associate Profesor
Faculty of Economics, University of Prishtina, skender.ahmeti@yahoo.com

Arben Dërmaku Assistant Profesor
Faculty of Economics, University of Prishtina, adermaku@hotmail.com

Abstract
The aim of this paper is to determine the effects of stock prices following the announcement of audited financial reports of Slovenian and Croatian public interest entities. Our research is to study the importance of variables and their significance regarding the audit in explaining the reactions of stock price movements (fluctuations). In this study we have applied discriminant analysis and logit models. Discriminant analysis and logit were performed with type of opinion as the dependent variable and eleven financial ratios as independent variables. Test results show that the audit quality, the auditor's opinion have an impact on the evolution of stock prices.

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Keywords: Audit report; audit opinion; stock price; financial statements; abnormal return; JEL Classification: M42, M40

1. Introduction In about half of the cases of audit reports there are notes with the most frequent the following statement. Without qualifying our opinion, we draw attention to: Qualified audit reports are usually issued for: scope limitations, violation of GAAP (i.e. IFRS, US GAAP, IFRS for SMEs, etc), material misstatements, inadequate disclosure, change in accounting method not justified, etc. There are also "modified" audit reports that warn users of particular issues. Strictly speaking these are unqualified reports, since no misstatements are detected. Modified audit reports are usually issued for: change in accounting method justified, going-concern, divided responsibility report (more than one auditor), and justified departure from GAAP (i.e. IFRS, US GAAP, IFRS for SMEs, etc), emphasis on a specific matter. Auditors use this report(s) to draw attention to an important accounting issue or an audit scope/test issue. A pending tax problem seems like it is a disclosure issue (a contingent liability that is not probable and measurable so no official recording is necessary but disclosure is

KNOWLEDGE IN FINANCE AND ACCOUNTING

Electronic copy available at: http://ssrn.com/abstract=2088126

EuroEconomica
Issue 2(31)/2012 ISSN: 1582-8859 necessary). If the statement discloses this, the audit report need not be altered. However, if it is material, this could be an emphasis of a matter. In Croatia and Slovenia, the audit reports are classified as unqualified reports, matters of emphasis, with exception, negative opinion, and qualified opinion. According to Spathis (2003) most of qualifications in financial statements in Croatia and Slovenia enjoy exception as type of qualification which is provided in case when the issues are material in nature but not fundamental disagreement or uncertainty. The motivation of this study is focused on the following determinant factors with regard to Croatia and Slovenia listed companies: 1. The very low rate of qualified audit reports (0.69%) in the year 2007 which reduced to 0.00% in 2008. It was also 0.00% in 1998,2005 and 2004, 2. The change of strictly unqualified reports from 58.04% in 2007 to 81.36% in 2008. It was 27.53 in 1998,36.42% in 2005 and 8.4% in 2004)*, 3. The very high rate of tax contingent liabilities (35.3 1%) in the year 2007 which reduced to 6.45% in 2008. It was 7.62% in 1998, 47.60% in 2005 and 49.86% in 2004, 4. The increase of the rate of "going-concern opinions" from 2.79% in 2007 to 5.36% in 2008. It was 3.19% in 2005 and no going-concern opinions in 2004, 5. audit reports with notes about accounting method changes...
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