Organization Capital and Modified Audit Opinion

This study explores the effects of intellectual capital (ΙC) on the occurrence of a modified audit opinion decision. We expect that high IC intensive firms are positively associated with the occurrence of a modified audit opinion since they are associated with an increased business risk, and are more likely to exhibit issues concerning their financial health and stability. Using a data sample of 423 listed firms from Greece, Italy, Spain, and Portugal over a 10-year period, we estimated a logistic regression model to examine the effects of IC on the probability that a modified audit opinion is issued. We used organizational capital as a measure of a firm’s intensity on IC. Empirical findings indicate a significant and positive relationship between the IC and the likelihood of a firm receiving a modified audit opinion decision. This study expands prior literature by exploring the predictive ability of IC on the likelihood of a firm receiving a modified audit opinion decision.