The objective of this research is to study the differences among firms with various combinations of audit qualifications in the current dual-audit-opinion setting. The Sarbanes- Oxley Act of 2002 (SOX) requires that a public company assess internal control over financial reporting and obtain an audit opinion on internal control, in addition to the traditionally required audit opinions on financial statements. The mandate of an audit opinion on internal controls introduces a different regulatory setting. After the enactment of the new legislation, public companies can be categorized into four groups, instead of two groups as in the pre-SOX period. A post-SOX public firm could belong to any of the four groups having different combinations of audit opinions: firms with clean audit opinions, firms with audit qualifications on only financial statements, firms with audit qualifications on only internal controls, and firms with audit qualifications on both financial statements and internal controls.
Researchers have extensively studied audit opinions on financial statements and internal control over financial reporting. This dissertation attempts to link these two streams of auditing research by studying the two different, yet potentially related, audit opinions. Expanding on previous research, this paper contributes to the existing auditing literature by further exploring the market effect of two audit opinions in the post-SOX era. Specifically, this study analyzes how the market reacts to various combinations of audit qualifications. Furthermore, the study investigates firm characteristics in an effort to identify the underlying factors associated with firms in the four groups. Besides examining the overall investor reaction, the paper also assesses the cross-sectional difference in investors’ risk perceptions of the firms.
This dissertation provides a connection between the literature focusing only on audit opinions on financial statements or only on audit opinions on internal controls. In addition, this dissertation is useful to researchers in better understanding the information content of audit opinions, and to investors in updating their portfolio strategies in a new regulatory environment. Moreover, this study sheds light on the ongoing debate regarding the effectiveness and efficiency of audit opinions on internal control over financial reporting.