Does Auditor Gender Affect Issuing Going-Concern Decisions For Financially Distressed Clients?

Accounting and Finance
Does auditor gender affect issuing going-concern

decisions for financially distressed clients?
Sarowar Hossaina, Larelle Chappleb, Gary S. Monroea

a
School of Accounting, UNSW Business School, UNSW Australia, Sydney, NSW,
b
QUT Business School, School of Accountancy, Queensland University of Technology,
Brisbane, QLD, Australia
Abstract
We investigate whether an audit partner’s gender is associated with the

likelihood of issuing a going-concern opinion for a financially distressed client.
Our analysis is based on data for a sample of Australian listed companies for
the period 2003–2011. Our results from unrestricted and propensity score-
matched samples and a Heckman two-stage model indicate that female audit
partners are less likely to issue a going-concern opinion for financially
distressed clients. Our findings provide evidence of differential audit outcomes
depending on the gender of the audit partner, thus implying that audit partner
gender affects the decision-making processes used when making the audit
reporting decision. These behavioural differences have the potential to influence
perceptions of financial reporting and audit quality.
Key words: Auditor gender; Audit quality; Going-concern opinion
JEL classification: M41, M42, M48
doi: 10.1111/acfi.12242
1. Introduction
Using data for publicly listed Australian companies, we examine whether

audit partner gender affects audit quality, measured as the likelihood that the
audit partner will issue a going-concern opinion for a financially distressed
We gratefully acknowledge the comments received from Mathew Ege and auditor
gender data identified by Jenny Lee. We thank Kris Hardies for his ongoing support and
interest in this project and the participants in the AAA 2012 Annual meeting. We also
thank the anonymous reviewers for their guidance and insights.
Received 5 November 2015; accepted 7 September 2016 by Tom Smith (Editor).
© 2016 AFAANZ
2 S. Hossain et al./Accounting and Finance
client. Auditor judgement is complex because the results of audit testing

contain numerous and inconsistent information cues and it has a high degree of
difficulty (Bonner, 1994). Increasingly, researchers are interested in how the
audit process is affected by the characteristics of the specific auditor who
performs the audit tasks because auditors’ propensity to make judgements and
decisions across varying levels of task complexity may be affected by their
personal characteristics (FRC Report, 2006; Church et al., 2008; McKnight
and Wright, 2011; Gul et al., 2013b). We study gender as an observable
characteristic of the auditor.
Prior experimental research documents the potential impact of auditor
gender on audit judgement (e.g. Chung and Monroe, 1998, 2001). In
addition, there is an extensive body of behavioural research that contends
that females act and perform differently in business decision-making than
males. Prior studies use different theoretical perspectives to explain the
behaviour of female and male leaders in business decision-making. Accord-
ing to organisational theory, females are associated with better organisa-
tional outcomes and improve and facilitate ‘tough’ decision-making (Clarke,
2005; Huse and Solberg, 2006; McInerney-Lacombe et al., 2008). The
economic psychology literature suggests that females are more conservative
and risk averse than males (Byrnes et al., 1999; Eckel and Grossman, 2008).
Studies in cognitive psychology acknowledge significant gender-based differ-
ences in, for example, information processing, diligence, conservatism and
risk tolerance (e.g. Feingold, 1994; Powell and Ansic, 1997; Byrnes et al.,
1999; Costa et al., 2001; Eckel and Grossman, 2002; Schmitt et al., 2008).
The selectivity hypothesis views women as detailed information processors
who process more of the available information cues and rely less on
heuristics (Meyers-Levy, 1986). These cognitive functions are relevant in the
audit process and auditor judgement (Ittonen and Peni, 2012; Ittonen et al.,
2013). Given that an audit engagement involves a series of tasks and
judgements over the course of each yearly engagement, we ask
whether behavioural theory frames whether female auditors are different
from male auditors in respect of the audit outcome for financially distressed
clients.
Our study is motivated by a number of auditing related issues. First, there
continues to be considerable researcher and regulatory interest in the auditor’s
propensity to issue going-concern (or other modified) audit opinions. We note
increased scrutiny of audit reports by regulators and standard setters during the
Global Financial Crisis (Xu et al., 2013). During the global financial crisis,
regulators and standard setters including the International Auditing and
Assurance Standards Board (IAASB, 2009), the Financial Accounting Stan-
dards Board (FASB, 2008), the Public Company Accounting Oversight Board
(PCAOB, 2009) and the Australian Securities and Investments Commission
(ASIC, 2008) all intervened to emphasise auditor responsibilities with the
relevant going-concern auditing standards (Xu et al., 2011). Standard setters
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S. Hossain et al./Accounting and Finance 3
are currently reviewing the relevant ‘going-concern’ standard (ISA 570 Going
Concern).1 Regulatory oversight has an impact on the auditor’s decision to
issue a going-concern opinion (Carson et al., 2013).
Second, receiving a going-concern opinion is generally regarded by audit
clients as an adverse outcome. It highlights the inherent tension an auditor
faces in appeasing the client, versus providing a diligent independent audit
service (Kida, 1980; Geiger et al., 1998; Carcello and Neal, 2003; Blay and
Geiger, 2013) in insulating them from potential litigation in the event of the
client’s bankruptcy (Carcello and Palmrose, 1994). The going-concern opinion
issued by the audit partner is the culmination of a series of complex auditor
judgements, tasks and decisions. In these situations, an auditor’s propensity to
make judgements and decisions across varying levels of task complexity may be
affected by their personal characteristics, including gender (FRC Report, 2006,
McKnight and Wright, 2011).
We are also motivated by presumed gender-based differences in cognitive
information processing such as conservatism and risk tolerance (Ittonen et al.,
2013), females being more detailed information processors who process more of
the available information cues and rely less on heuristics (Meyers-Levy, 1986),
and ethical decision-making (Pierce and Sweeney, 2010). As noted above, there
appears to be empirical evidence that gender affects the decision-making and
judgement propensity of professionals including auditors. Ittonen et al. (2013)
note that ‘gender differences in cognitive information processing, diligence,
conservatism, overconfidence and risk tolerance may have important implica-
tions for the audit process and auditor judgements and, thus, ultimately, for the
quality of audited financial information’.
Our study is also motivated by recent studies on auditor gender and audit
quality by Chin and Chi (2008), Karjalainen et al. (2013), Ittonen et al.
(2013), and Hardies et al. (2016). These studies report that female audit
partners are associated with higher audit quality. However, these studies use
data from Taiwan, Finland and Belgium. We use Australian data and the
Australian capital market setting, liability regime and audit environment
differ significantly from these recent studies and these differences have the
potential to affect the relation between gender and decision-making and
therefore the relation between gender and audit quality. First, Chin and Chi
(2008) use Taiwanese data and Chen et al. (2008) note that Taiwanese audit
firms are unlimited liability partnerships or proprietorships. By contrast,
Australian audit firms are typically formed as limited liability partnerships or
1
For example, the exposure draft ISA570.17 proposes a new paragraph mandating the
basis of the auditor’s judgment: ‘The auditor shall evaluate whether sufficient
appropriate audit evidence has been obtained and conclude regarding the appropriate-
ness of management’s use of the going-concern basis of accounting in the preparation of
the financial statements’. The Auditing and Assurance Standards Board issued exposure
Draft 01/15 Proposed Auditing Standard ASA 570 Going Concern in April 2015.
© 2016 AFAANZ
companies and there is a statutory cap on auditor civil liability to third

parties. These different organisational forms and legal regimes expose the
auditors to different potential liabilities, which could impact on their decision-
making. Second, both Karjalainen et al. (2013) and Ittonen et al. (2013) use
Finnish data, where expected costs of litigation and the potential loss of
reputation of the auditor are relatively low, which may impact on auditor
decision-making (Karjalainen et al., 2013). Third, Hardies et al. (2016) use
data for private Belgian firms audit clients; however, private firms are not
subject to the same regulatory oversight and public scrutiny and this may
have affected auditor decision-making. Audits of Australian listed firms occur
in a legal environment where the identified lead audit partner is responsible
for making audit decisions, determining the audit opinion to be issued to the
client and signing the audit report. This degree of external or regulatory
scrutiny operates as a constraint in the environment for going-concern
opinions where listed companies are more accountable to their stakeholders
and face more scrutiny than private companies, which may impact on auditor
decision-making.
How likely is it that this environment contextualises the behavioural theories
on gendered decision-making, leading to a new set of results? The lead
engagement partner plays a central role in planning and implementing the audit
and ultimately in determining the appropriate type of audit report to be issued
to the client, and the engagement partner also suffers serious harm as a result of
an audit failure (Ferguson et al., 2003; Zerni, 2012; Krishnan and Hossain,
2015). Such an environment heightens what is at stake for the audit partner in
terms of their personal reputation and private benefits (such as job security,
promotion opportunity, etc.) when making audit decisions (Chen et al., 2010).
Overall, the auditing literature suggests that female auditors make different
decisions than male auditors. Female auditors are typically more conservative
than male auditors because of their relatively high-risk aversion levels, which
should be reflected in audit quality. Given that many prior findings related to
gender differences in business decision-making can be attributed to the
behavioural propensity that females are more risk averse than males, it is
likely that a country’s litigation risk environment will impact on auditors’
decision-making and that risk-taking differences between and males and
females may be relevant in this context. Alternatively, given that prior research
finds that female participants are more accurate and effective information
processors in complex audit tasks than male participants, female auditors may
utilise more precise information to support their audit judgement about
whether there is a going-concern threat to a client. Accordingly, behavioural
theories may still explain the result in terms of issuing a going-concern opinion
for a financially distressed client, and the contextual difference may explain the
direction of our result.
This study contributes to the literature by providing evidence as to the role of
the audit partner’s gender in influencing these competing incentives as
© 2016 AFAANZ
represented by the issuance of a going-concern opinion for a financially

distressed client. There is limited archival research on the effects of auditor
gender on audit quality, for reasons including data availability. Australia
provides an ideal environment for empirical research on audit partner’s gender
and audit quality because longitudinal data identifying the signing audit
partner(s) are available and only one audit partner has to sign the audit report,
which makes it easier to identify who is responsible for the audit.2 We
conjecture that the likelihood of issuing a going-concern opinion for financially
distressed companies would be different between male and female auditors due
to their risk-averse and conservative behaviour, in an institutional environment
where the audit partner is personally identified.
Our results using unrestricted and propensity score-matched samples and a
Heckman two-stage model indicate that female audit partners are less likely than
male audit partners to issue going-concern opinions for financially distressed
clients after controlling for client importance (at the audit partner and firm
levels), client risk, client retention, and the audit partner’s industry expertise.
Therefore, our results suggest that female audit partners are associated with
lower audit quality, which is contrary to the findings of Chin and Chi (2008),
Karjalainen et al. (2013), Ittonen et al. (2013) and Hardies et al. (2016), which
report that female audit partners are associated with higher audit quality. Our
findings are consistent with prior experimental studies, which suggest that
auditor gender plays an important role in the auditor judgement and decision-
making. Our findings support the notion that female auditors in Australia make
different decisions than male auditors in Australia in regard to issuing going-
concern audit opinions for financially distressed clients.
The rest of our paper is organised as follows: Section 2 discusses the extant
literature leading to the development of the hypothesis, followed by the
research methods in Section 3. Section 4 reports the main results followed by
sensitivity analyses. Section 5 reports our results using an alternative measure
of audit quality, discretionary accruals. Section 6 provides the discussion and
conclusion to demonstrate that gender is an important construct in informing
audit judgement.
2. Prior research and hypothesis development
2.1. Gender in corporate governance
The accounting literature demonstrates substantial interest in gender as an

informative characteristic in accounting, auditing and corporate governance.
2
We thank Kris Hardies for pointing out that audit partner sign off is now in the EU
since 2010: European Directive 2006/43/EC. As explained in Gul et al. (2013a,b), China
is another jurisdiction that has identified audit partners since 1998, although the audit
report usually has two signing partners.
© 2016 AFAANZ
Women in senior management positions have a higher propensity to comply

with rules and regulations in taxation and financial decision-making contexts
(Baldry, 1987; Bernardi and Arnold, 1997). Female representation on the board
has been shown to lower the likelihood that management will engage in
opportunistic income-increasing earnings management (Peni and V€ah€amaa,
2010; Srinidhi et al., 2011). Earnings quality is positively associated with
gender diversity in senior management (Krishnan and Parsons, 2008; Barua
et al., 2010), gender diversity on boards leads to transparency and accuracy in
financial reports (Gul et al., 2013a), board diversity is associated with the
Australian top 500 companies performance (Vafaei et al., 2015) and greater
gender diversity on the board of the Australian top 500 listed companies
moderates excessive firm risk, which in turn improves firms’ financial
performance (Hutchinson et al., 2015).
Studies conducted in capital market settings tend to use theories and findings
from the wider gender-based decision-making context to inform conjectures as
to females’ management, leadership and decision-making propensities. How-
ever, such studies generally appeal to two broad theories to explain why
gender-diverse boards provide superior monitoring: agency theory or resource
dependency theory (Hutchinson et al., 2015). Such theories explain that female
representation on boards improves board behaviour and effectiveness because
female directors are better prepared for the board meeting and are associated
with better attendance (Fondas and Sassalos, 2000; Huse and Solberg, 2006;
Adams and Ferreira, 2009). At their core, however, these findings can be
attributed to the behavioural propensity that female board members are more
risk averse than male board members and are less likely to engage in unethical
behaviour than males.
2.2. Gender in auditing judgement
In the auditing literature, judgement and decision-making research provide

evidence of the gendered effects on audit judgements using experimental
research designs. Chung and Monroe (1998, 2001) find that female participants
are more accurate and effective information processors in complex audit tasks
than male participants. In contrast, O’Donnell and Johnson (2001) report that
females are less efficient in audit judgements than their male counterparts.
Using audit practitioners, Hardies et al. (2012) find no evidence for a gender
difference in auditor overconfidence in audit tasks. Breesch and Branson
(2009) analyse the final written exams administered by the Professional Body
of Belgian Auditors of 20 female and 20 male auditing trainees (junior
auditors), and they find no significant difference in the severity of the
recommended audit opinion by male and female auditors. They note that
female auditors discover more potential misstatements than male auditors;
however, females analyse misstatements in a less accurate manner than males.
In a study examining moral development of audit staff, Bernardi and Arnold
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(1997) find that female audit staff at manager level have higher moral
development than male managers.
Recent archival research that investigates the effect of auditor’s gender on
audit quality finds that female auditors have a positive association with audit
quality (Chin and Chi, 2008; Ittonen et al., 2013; Karjalainen et al., 2013;
Hardies et al., 2016). Using Taiwanese listed companies, Chin and Chi (2008)
find that female auditors are more likely to issue going-concern audit opinions
than male auditors. Karjalainen et al. (2013) also find that female auditors are
more likely to issue going-concern audit opinions and that clients have lower
discretionary accruals when audited by female signing audit partners. Using
7,105 financially distressed private Belgian companies, Hardies et al. (2016)
find that female auditors are more likely to issue going-concern opinions than
male auditors. Ittonen et al. (2013), using a sample of 371 Finnish and
Swedish NASDDAQ/OMX-listed firms, find that female audit engagement
partners are associated with smaller unexpected accruals, hence constraining
earnings management. However, the characteristics of the audit environments
where those studies are different than the Australian audit environment for
listed companies. First, Chin and Chi (2008) use data for Taiwanese
companies where audit firms are unlimited liability partnerships or propri-
etorships. By contrast, Australian audit firms are formed as limited liability
partnerships or companies and there is a statutory cap on auditor civil
liability to third parties. These different organisational forms and legal
regimes expose auditors to different potential liabilities, which could impact
on their decision-making. Second, both Karjalainen et al. (2013) and Ittonen
et al. (2013) use Finnish data, where expected costs of litigation and the
potential loss of reputation of the auditor are relatively low, which may
impact on auditor decision-making (Karjalainen et al., 2013). Third, Hardies
et al. (2016) use data for private Belgian firms; however, private firms are not
subject to the same regulatory oversight and public scrutiny and this may
have affected auditor decision-making. Audits of Australian listed firms occur
in a legal environment where the identified lead audit partner is responsible
for making audit decisions, determining the audit opinion to be issued to the
client and signing the audit report. This degree of external or regulatory
scrutiny operates as a constraint in the environment for going-concern
opinions where listed companies are more accountable to their stakeholders
and face more scrutiny than private companies, which may impact on auditor
decision-making.
Studies have examined the association between female representation on
audit committees and audit quality. Female representation on the audit
committee arguably strengthens corporate governance, due to perceived female
conservative and ethical qualities. For example, there is a significant positive
association between cumulative abnormal returns and female audit committee
membership (Huang et al., 2011). However, Sun et al. (2011) were unable to
© 2016 AFAANZ
identify a direct association between the proportion of female directors on

audit committees and the extent of earnings management.
Overall, the auditing literature suggests conjecture around whether female
auditors make different decisions than male auditors. Female auditors are
typically more conservative than male auditors because of their relatively high-
risk aversion levels, which should be reflected in audit quality. However, the
audit opinion is the culmination of an audit process that has required major
decisions along the path, from client acceptance to audit tasks to the final
opinion (Knechel et al., 2009). Accordingly, we recognise that the risk aversion
of female auditors may manifest itself in different ways, such as from the
perspective of wishing to avoid the scrutiny that accompanies a going-concern
opinion or the risk of triggering the client’s decision to switch auditors to the
detriment of the audit firm. This risk may outweigh the perceived personal
reputation and litigation risk to the auditor personally (Geiger et al., 1998;
Carcello and Neal, 2003; Blay and Geiger, 2013). Alternatively, female auditors
may utilise more precise information to support their audit judgement about
whether there is a going-concern threat to a client, or they may wish to avoid
potential litigation resulting from not issuing a going-concern opinion. Given
the competing arguments presented above, we present the following non-
directional hypothesis:
H: There is a significant association between audit partner gender and the

likelihood of issuing a going-concern opinion for a financially distressed
company.
3. Research design and method
3.1. Sample selection
Data for the audit opinion, audit partner, audit report date, audit/non-audit
fees were hand-collected directly from the audit reports. The sources of annual
reports are Morningstar DatAnalysis Premium (n = 16,302),3 Connect4
(n = 14,823) and company websites. We identified the audit partner’s gender
based on their full name. We use data for the period 2003–20114 covering all
listed companies, and the initial sample was 14,823 firm-year observations.
Consistent with prior going-concern studies (DeFond et al., 2002; Carey and
3
This sample includes both listed and delisted; thus, the number of companies in
Connenct4 is different. We used Connect4 annual report collection database for our
sample selection because this database has only ASX listed companies during the
financial year. We use the Morningstardirect database to calculate our market variables.
4
Our sample period begins from 2003 because before 2003 there was very limited
coverage of annual reports on online databases.
© 2016 AFAANZ
Table 1
Sample description
Number of firm-year
Sample characteristics observations
Number of firm-year observations 14,823

Two audit partners 52
Gender cannot be identified 54
Required data not available 2,571
Non-distressed companies 4,785
Final sample 7,361
Table 2
Number of sample firms by industry
GICS code (Industry) Frequency Percentage
10 (Energy) 885 12.02

15 (Materials) 91 1.24
20 (Industrials) 545 7.40
25 (Consumer Discretionary) 450 6.11
30 (Consumer Staples) 191 2.59
35 (Health Care) 741 10.07
40 (Financials) 920 12.50
45 (Information Technology) 526 7.15
50 (Telecommunication Services) 126 1.71
55 (Utilities) 101 1.37
151040 (Metals & Mining) 2,785 37.83
Total 7,361 100.00
Simnett, 2006; Fargher and Jiang, 2008; Lim and Tan, 2008; Robinson, 2008),
we restrict our sample to companies that reported either a negative net profit
or negative cash flows from operations in the current year.5 The final sample
as shown in Table 1 is 7,361 firm-year observations, after excluding companies
that had two audit partners (n = 52 firm-year observations) or did not have
the audit partner’s name in the annual reports or where we failed to
unambiguously identify the auditor’s gender (n = 54 firm-year observations)
or otherwise had missing data (n = 2,571 firm-year observations). The sample
(n = 7,361 firm-year observations) description by industry classification is
provided in Table 2. The predominance of metals and mining sector is a
particular aspect of the Australian capital market (37.83 percent of the
5
In our additional tests, we restrict our sample to severely distressed companies, that is
companies reporting both a negative net profit and negative cash flows from operations
in the current year.
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sample), and as explained below, we use this industry sector in constructing a

control variable.
3.2. Model
We first test our hypothesis by estimating the coefficients using a standard

single-stage logistic regression model (Eqn 1) for the auditor’s likelihood of
Table 3
Descriptive statistics for the sample companies during 2003–2011
Full sample Female

(n = 7,361) sample Male sample
(n = 390) (n = 6,971)
Variables Mean SD Mean Mean t-value p-value VIF
Total Assets ($M) 1,020.00 18,600.00 4,070.00 849.00 3.329 0.001

Company age 11.82 9.66 11.94 11.82 0.246 0.806
GCOPINION 0.25 0.43 0.15 0.25 4.343 <0.001
FEMALE 0.05 0.22 1.00 – – – 1.040
PQUAL 0.26 0.44 0.19 0.26 2.981 0.003 1.550
BANKRUPTCY_ 1.97 6.56 2.45 1.95 1.458 0.145 1.370
SCORE
SIZE 16.55 2.05 16.94 16.53 3.928 <0.001 2.030
LnAGE 2.16 0.84 2.22 2.16 1.369 0.171 1.110
LEVERAGE 2.09 13.04 1.17 2.14 1.435 0.151 3.000
Chg_LEVERAGE 2.44 31.94 0.33 2.56 1.344 0.179 1.010
ROA 0.31 9.08 0.32 0.31 0.022 0.982 1.050
PLOSS 0.80 0.40 0.77 0.80 1.598 0.110 1.310
INVESTMENTS 0.30 0.44 0.31 0.30 0.344 0.731 1.220
BIG4 0.40 0.49 0.70 0.38 12.528 <0.001 1.430
FEERATIO 0.10 0.28 0.11 0.10 0.276 0.782 1.090
CASHFLOW 0.21 1.60 0.18 0.22 0.472 0.637 2.960
MINING 0.38 0.49 0.36 0.38 0.935 0.350 2.610
AP_TENURE 2.75 1.95 2.69 2.76 0.697 0.486 1.600
P_IND_SPECLST 0.06 0.24 0.05 0.06 0.716 0.474 1.160
CI_FIRM 0.07 0.19 0.04 0.07 2.918 0.004 1.480
CI_PARTNER 0.26 0.31 0.33 0.25 4.509 <0.001 1.800
AP_CHANGE 0.29 0.45 0.39 0.26 4.342 <0.001 4.030
INITIAL 0.31 0.46 0.39 0.30 3.469 0.001 4.310
MODI_CHANGE 0.08 0.28 0.08 0.08 0.447 0.655 1.720
RETURN 23.02 132.48 12.82 23.59 1.562 0.118 1.130
BETA 1.43 3.21 1.55 1.42 0.750 0.453 1.010
VOLATILITY 66.60 90.86 61.60 66.88 1.116 0.265 1.120
UNEXP_AF 0.50 0.50 0.47 0.50 1.289 0.197 1.060
REP_LAG 82.37 21.62 77.33 82.65 4.736 <0.001 1.220
NUM_CLIENTS 8.98 9.18 4.82 9.22 9.255 <0.001 1.630
See Appendix I for variable definitions.
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issuing a going-concern opinion to a financially distressed client. Our choice of

independent variables is influenced by previous research, specifically, DeFond
et al. (2002), Carey and Simnett (2006), Cahan et al. (2008), Callaghan et al.
(2009) and Blay and Geiger (2013) and audit firm- and partner-specific
characteristics that need to be controlled for, to disentangle the gender effects
on audit opinions.
Table 3 reports that several client characteristics of female audit partners
are significantly different from male partners’ clients. Thus, our results may be
influenced by the selection bias or differences in characteristics between male
and female audit partners’ clients. To address this possible selection bias, we
also use propensity-score matching (PSM), as proposed by Rosenbaum and
Rubin (1983), which has been used by several accounting studies (e.g.
Lawrence et al., 2011; Minutti-Meza, 2013). In the first stage (Eqn 2), we
estimate a logistic regression where the dependent variable is FEMALE and
the independent variables are the control variables including year dummies
and firm fixed effects in Equation (1) to estimate a propensity score. We use
the calliper matching method and match, without replacement, using a
calliper of three percent. This procedure creates a pseudo ‘random’ sample in
which audit partner gender is randomly allocated to both the treatment and
control groups with the result that differences between the two groups should
reflect the treatment effect and not pre-existing client characteristics (Heck-
man et al., 1997; Dehejia and Wahba, 2002; Heckman and Navarro-Lozano,
2004; Lawrence et al., 2011). After matching, in stage 2, we reran
Equation (1) in the matched sample of female and male audit partners’
clients.
In addition, we also report results using the Heckman (1979) two-stage
procedure because matching between engagement partners and clients may
not be random (Hardies et al., 2016). Hardies et al. (2016) argue that
companies with a higher likelihood of receiving a GCOPINION are audited
by female audit partners more often than by male partners, either because
such companies more often select female audit partners or because female
audit partners are more often assigned to such clients. Consistent with
Hardies et al. (2016), we identify the total number of female audit partners
within each audit firm (AUDITFORCE) as our instrumental variable in
stage 1 (Eqn 3). Following Hardies et al. (2016), we expect a positive
coefficient for this variable because an audit firm with a higher number of
female audit partners is more likely to have a female audit engagement
partner. This variable can be excluded from the second-stage model because
there is no theoretical reason to expect this variable to affect the
GCOPINION decision in any way other than through the audit partner
allocation decision (Hardies et al., 2016). The regression models are as
follows:
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GCOPINION ¼ a0 þ a1 FEMALE þ a2 PQAUL

þ a3 BANKRUPTCYS CORE þ a4 SIZE þ a5 LnAGE
þ a6 LEVERAGE þ a7 ChgL EVERAGE þ a8 ROA
þ a9 PLOSS þ a10 INVESTMENTS þ a11 BIG4
þ a12 FEERATIO þ a13 CASHFLOW þ a14 MINING
:
þ a15 APT ENURE þ a16 PI NDS PECLST þ a17 CIF IRM
þ a18 CIP ARTNER þ a19 APC HANGE þ a20 INITIAL
þ a21 MODIC HANGE þ a22 RETURN þ a23 BETA
þ a24 VOLATILITY þ a25 UNEXPA F þ a26 REPL AG
þ a27 NUMC LIENTS þ
ð1Þ
FEMALE ¼ a0 þ a1 PQAUL þ a2 BANKRUPTCYS CORE þ a3 SIZE

þ a4 LnAGE þ a5 LEVERAGE þ a6 ChgL EVERAGE þ a7 ROA
þ a14 APT ENURE þ a15 PI NDS PECLST þ a16 CIF IRM :
ð2Þ
FEMALE ¼ a0 þ a1 AUDITFORCE þ a2 PQAUL

þ a3 BANKRUPTCYS CORE þ a4 SIZE þ a5 LnAGE
þ a6 LEVERAGE þ a7 ChgL EVERAGE þ a8 ROA
:
þ a15 APT ENURE þ a16 PI NDS PECLST þ a17 CIF IRM
ð3Þ
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The variable of interest is FEMALE defined as 1 if the audit engagement partner

is female, 0 otherwise. Our control variables are based on prior studies modelling
going-concern opinions including both contributing and mitigating factors in
predicting going-concern opinion for financially distressed companies. The prior
year audit opinion (PQUAL) is a good predictor of the current year’s audit
opinion (Monroe and Teh, 1993), and we expect it to have a positive association
with GCOPINION. Similar to Carey and Simnett (2006) and Blay and Geiger
(2013), we include BANKRUPTCY_SCORE because financial distress is an
important factor in the auditor’s decision, and we expect it to have a positive
association with GCOPINION. The auditor considers the company’s perfor-
mance in issuing audit opinions (Monroe and Teh, 1993; Carey and Simnett,
2006; Chen et al., 2010). We use return on assets (ROA) and prior year loss
(PLOSS) to control for this performance effect. We expect a negative association
between ROA and GCOPINION because clients with higher returns are less likely
to receive a GCOPINION, and we expect a positive association between PLOSS
and GCOPINION because companies that report a net loss in the prior year are
more likely to receive a going-concern opinion (Blay and Geiger, 2013).
INVESTMENTS is a liquidity measure that captures the ability to quickly raise
cash (Carey and Simnett, 2006) and a firm that has higher INVESTMENTS may
be less likely to receive a GCOPINION. We use CASHFLOW because poor net
operating cash flows are associated with bankruptcy (Blay and Geiger, 2013), and
we expect this variable to have a positive association with GCOPINION. The
auditor also considers the leverage of the client (Carey and Simnett, 2006; Chen
et al., 2010), so we include LEVERAGE and Chg_LEVERAGE. We expect a
positive association between LEVERAGE and GCOPINION, but the association
between Chg_LEVERAGE and GCOPINION may be positive or negative
depending on the direction of change. We include BIG4 and expect a positive
association with GCOPINION because prior studies argue that Big 4 auditors are
more likely to issue going-concern opinions to distressed companies (e.g.
Mutchler et al., 1997; Blay and Geiger, 2013).
Large companies have less uncertainty than smaller companies and auditors
are less likely to issue a going-concern opinion for larger companies. We
include the natural log of total asset (SIZE) and expect a negative association
with GCOPINION. Companies listed for a longer time (LnAGE) may have less
uncertainty because younger companies are more prone to failure (Dopuch
et al., 1987; DeFond et al., 2002; Blay and Geiger, 2013), and we expect a
negative association with GCOPINION. Mining companies have different
characteristics and risk profiles (Carey et al., 2012) than other companies, so
we include an indicator variable MINING to control for industry effect and
expect this variable to have a positive association with GCOPINION. An
auditor’s propensity to issue a going-concern opinion may be affected by their
economic bond (FEERATIO) and length of relationship with a client
(AP_TENURE). We expect negative associations between FEERATIO,
AP_TENURE and GCOPINION. We also control for four audit firm/
© 2016 AFAANZ
partner-level variables, that is P_IND_SPECLST, CI_FIRM, CI_PARTNER

and UEXP_AF. We include an industry specialist indicator variable
(P_IND_SPECLST) because industry specialisation is associated with an
enhanced ability to detect fraud and material errors, hence higher audit quality
(e.g. Bedard and Biggs, 1991; Johnson et al., 1991; Craswell et al., 1995;
Wright and Wright, 1997; Balsam et al., 2003; Knechel et al., 2013). We expect
this variable to have a positive association with GCOPINION. An auditor may
not issue a going-concern opinion for an economically important client (Chung
and Kallapur, 2003; Chen et al., 2010). We include client importance to the
audit firm (CI_FIRM) and client importance to an audit partner (CI_PART-
NER) and unexpected audit fee earned by an audit partner (UNEXP_AF) to
control for this effect and expect these variables to have negative associations
with GCOPINION. Consistent with Blay and Geiger (2013), we include
market-based variables such as RETURN, BETA and VOLATILITY and we
expect negative associations between RETURN, BETA and GCOPINION and
a positive association between VOLATILITY and GCOPINION.
An audit partner’s risk aversion may affect their judgement in issuing a
going-concern opinion for a financially distressed client. There are indirect
ways to measure risk aversion including client acceptance, client retention and
auditor–client management negotiation. Prior studies argue that as the auditor
does not directly control the client management’s accounting if there is
disagreement between management and the auditor, the auditor may resign or
qualify the audit opinion (McConnell, 1984). If the auditor issues a qualified
opinion, the auditor may resign or may be replaced by the client (Smith, 1986;
Gibbins et al., 2001, 2005; McCracken et al., 2006 Carey et al., 2008; Blay and
Geiger, 2013). To control for these client acceptance and retention effects, we
include audit partner change (AP_CHANGE), audit partner’s first or second
year of the audit engagement (INITIAL) and audit partner change due to a
previous year’s modified opinion (MODI_CHANGE) and we expect positive
associations with GCOPINION. To control for auditor client management
negotiations, we include REP_LAG because going-concern opinions are
associated with longer audit reporting lags (Chen and Church, 1992; Behn
et al., 2001; Geiger et al., 2005; Blay and Geiger, 2013). We include the number
of clients an audit partner audits in a particular year (NUM_CLIENTS)
because an audit partner with fewer clients may be less likely to issue a going-
concern opinion in order to avoid losing an audit client, and we expect this
variable to have a negative association with GCOPINION.
4. Results
4.1. Descriptive statistics
Table 3 presents the descriptive statistics for our sample of 7,361 financially
distressed companies as well as male and female audit partners’ samples. The
© 2016 AFAANZ
average size of our sample companies is $1,020 million and they have been
listed on the ASX for an average of 11.82 years. Female audit partners have
larger clients ($4,070 million) than male audit partners ($849 million) and the
difference is significant. Female audit partners issue fewer going-concern
opinions (15.40 percentage) than male audit partners (25.10 percentage), and
the difference is significant. There is no significant difference in audit partner
tenure between female (2.69 years) and male (2.76 years) audit partners.
Female and male audit partners have a similar percentage of loss making clients
(76.70 and 80.00 percentages, respectively) and the difference is not significant.
The average BANKRUPTCY_SCORE of companies with a female audit
partner (2.45) is not significantly different from companies with a male audit
partner (1.95). Mulitcollinearity does not appear to be a significant
impediment to the interpretation of our results because the highest variance
inflation factor (VIF) is 4.31 and most of the cases are less than 2.
4.2. Female audit partners over the sample period
Table 4 provides the number and percentage of female and male audit
partners over the sample period for our sample companies. The percentage of
engagements with a female audit partner increased over the sample period. The
percentage of clients audited by female audit partners gradually increased from
3.93 percentage in 2003 to 7.36 percentage in 2011.
4.3. Multivariate results
Table 5 provides the logistic regression results for our GCOPINION models
after clustering by client firms, and including industry and year dummies as
control variables. Model 1 is our base model without the test variable. Model 2
includes our test variable (FEMALE) and is reasonably well fitted with a pseudo
R2 of 0.3000. The results for our unrestricted sample (Model 2, n = 7,361)
indicate that female audit partners are less likely to issue a going-concern opinion
for a financially distressed client and the association is significant (coeffi-
cient = 0.591, p < 0.001, two-tailed). Table 5 (Model 3) reports the results
based on our PSM sample (n = 744). The results for the first-stage model reported
in Appendix II, Panel A, indicate that the first-stage model is significant
(p < 0.001) and has a reasonable fit with a pseudo R2 of 0.1096. None of the
control variables are significantly different between the test and control samples
in our PSM sample (see Appendix II, Panel B). In our PSM sample results
reported as Model 3 in Table 5, the test variable, FEMALE, remains negative and
significant (coefficient = 0.790, p < 0.001, two-tailed) indicating that our
results are not influenced by selection bias. With respect to our Heckman two-
stage model, AUDITFORCE is positive and significant as reported in the first-
stage in the first stage of our Heckman two-stage model (Appendix II, Panel A).
In the second stage of our Heckman model (Model 4 in Table 5), FEMALE is
© 2016 AFAANZ
Table 4
Male and female audit partners during 2003–2011
Number
Year of observations Percentage
2003
Female 25 3.93
Male 611 96.07
Total 636 100.00
2004
Female 24 4.06
Male 567 95.94
Total 591 100.00
2005
Female 35 4.32
Male 776 95.68
Total 811 100.00
2006
Female 34 4.88
Male 663 95.12
Total 697 100.00
2007
Female 35 4.51
Male 741 95.49
Total 776 100.00
2008
Female 42 4.89
Male 817 95.11
Total 859 100.00
2009
Female 66 6.22
Male 995 93.78
Total 1,061 100.00
2010
Female 60 6.05
Male 932 93.95
Total 992 100.00
2011
Female 69 7.36
Male 869 92.64
Total 938 100.00
significant and negative suggesting that our main results do not suffer from
selection bias. The findings for our unrestricted and PSM samples, and our
Heckman two-stage model support our hypothesis. Carey and Simnett (2006)
argue that audit quality is diminished when the probability of issuing a going-
concern opinion is inversely related to the audit partner characteristic of interest
after controlling for other factors. Consistent with this argument, our findings
indicate that the female audit partners are less likely to issue a going-concern
© 2016 AFAANZ
opinions for a financially distressed company, which suggests female audit

partners are associated with lower audit quality.
We find significant and positive associations between PQUAL, BANK-
RUPTCY_SCORE, PLOSS, BIG4, P_IND_SPECLST, CI_PARTNER,
UNEXP_AF; REP_LAG and GCOPINION. We find significant and negative
associations between SIZE, LEVERAGE, INVESTMENTS, MINING and
GCOPINION. The other control variables are not significantly associated with
GCOPINION.
4.4. Robustness checks
4.4.1. Type I and Type II audit errors
Predicting bankruptcy is not the objective of an audit, although the failure to

issue a going-concern opinion prior to bankruptcy is widely viewed as an audit
failure (Hardies et al., 2016). Consistent with Hardies et al. (2016), we test the
accuracy of the auditor’s reporting decision using Type I and Type II errors.
Following Knechel and Vanstraelen (2007) and Hardies et al. (2016), we use a
categorical variable ERROR defined as 0 if the auditor issued a going-concern
opinion and the company failed6 within next 12 months or if the auditor did
not issue a going-concern opinion and the company survived for the next
12 months (i.e. no audit error); 1 if the auditor issued a going-concern opinion
and the company survived over the next 12 months (i.e. a Type I error); and 2 if
the auditor did not issue a going-concern opinion and the company failed
within the next 12 months (i.e. a Type II error). Then, we estimate the
following multinominal logistic regression:
ERROR ¼ a0 þ a1 FEMALE þ a2 PQAUL þ a3 BANKRUPTCYS CORE

þ a4 SIZE þ a5 LnAGE þ a6 LEVERAGE þ a7 ChgL EVERAGE
þ a8 ROA þ a9 PLOSS þ a10 INVESTMENTS þ a11 BIG4
þ a15 APT ENURE þ a16 PI NDS PECLST þ a17 CIF IRM :
ð4Þ

6
Failed means an administrator, liquidator or receiver was appointed to the company.
This information was extracted from the Morningstar database.
© 2016 AFAANZ
Table 5
18
Logistic regression results for going-concern opinions issued during 2003–2011
Model 1† Model 2‡ Model 3§ Model 4¶

Variables Expected sign Coefficient (z) Coefficient (z) Coefficient (z) Coefficient (z)
Intercept ? 1.421*** (2.87) 1.332*** (2.69) 0.443 (0.26) 0.865*** (2.686)
© 2016 AFAANZ
FEMALE ? 0.591*** (3.03) 0.790*** (3.12) 0.285*** (2.994)
PQUAL + 2.032*** (22.73) 2.033*** (22.74) 2.448*** (6.34) 1.155*** (24.55)
BANKRUPTCY_SCORE + 0.075*** (8.21) 0.074*** (8.15) 0.059 (1.53) 0.036*** (10.44)
SIZE 0.205*** (7.74) 0.208*** (7.87) 0.217** (2.52) 0.102*** (7.200)
LnAGE 0.025 (0.56) 0.026 (0.59) 0.024 (0.15) 0.009 (0.371)
LEVERAGE + 0.023 (1.61) 0.023* (1.65) 0.005 (0.11) 0.009*** (4.168)
Chg_LEVERAGE ? 0.004 (1.15) 0.004 (1.14) 0.007 (0.63) 0.002* (1.785)
ROA 0.009 (0.76) 0.009 (0.77) 0.021 (0.10) 0.009 (0.411)
PLOSS + 0.207** (2.04) 0.216** (2.13) 0.823* (1.84) 0.110* (1.859)
INVESTMENTS 1.055*** (10.61) 1.057*** (10.61) 1.470*** (3.86) 0.589*** (11.55)
BIG4 + 0.240*** (2.84) 0.271*** (3.22) 0.255 (0.87) 0.151*** (3.319)
FEERATIO 0.175 (1.29) 0.181 (1.33) 0.669 (1.31) 0.136* (1.786)
CASHFLOW + 0.094 (1.09) 0.099 (1.13) 1.058*** (2.94) 0.029 (1.133)
MINING + 0.453*** (5.89) 0.445*** (5.79) 0.026 (0.09) 0.036 (0.565)
AP_TENURE 0.006 (0.35) 0.006 (0.35) 0.129* (1.72) 0.007 (0.662)
P_IND_SPECLST + 0.254 (1.62) 0.274* (1.77) 0.080 (0.11) 0.116 (1.373)
CI_FIRM 0.100 (0.42) 0.114 (0.48) 0.161 (0.16) 0.018 (0.158)
CI_PARTNER 0.295** (2.01) 0.304** (2.07) 0.531 (1.01) 0.161** (1.976)
S. Hossain et al./Accounting and Finance
AP_CHANGE ? 0.236 (1.57) 0.217 (1.45) 0.166 (0.32) 0.133 (1.543)

INITIAL ? 0.122 (0.89) 0.117 (0.86) 0.285 (0.54) 0.067 (0.796)
MODI_CHANGE + 0.256* (1.65) 0.247 (1.59) 0.513 (0.87) 0.156* (1.925)
RETURN 0.000 (1.11) 0.000 (1.07) 0.003** (1.97) 0.000 (0.988)
BETA 0.005 (0.59) 0.004 (0.57) 0.052 (1.11) 0.003 (0.519)
VOLATILITY + 0.000 (0.21) 0.000 (0.28) 0.002 (0.73) 0.000 (0.094)
UNEXP_AF + 0.020*** (6.31) 0.020*** (6.23) 0.414 (1.55) 0.210*** (5.415)
(continued)
Table 5 (continued)
Model 1† Model 2‡ Model 3§ Model 4¶
© 2016 AFAANZ
Variables Expected sign Coefficient (z) Coefficient (z) Coefficient (z) Coefficient (z)
REP_LAG + 0.366*** (5.08) 0.365*** (5.07) 0.011** (2.28) 0.011*** (6.667)

NUM_CLIENTS 0.007 (1.61) 0.006 (1.34) 0.117** (2.38) 0.005** (2.068)
IMR 0.387*** (6.949)
Year effects Yes Yes Yes Yes
Firm fixed effects Yes Yes Yes Yes
N 7,361 7,361 774 7,361
LR v2(20) 1372.13 1368.860 193.670
Prob > v2 <0.001 <0.001 <0.001
Pseudo R2 0.2985 0.3000 0.3793
†
Model 1 – Base model without the test variable.
‡
Model 2 – Model with test variable.
§
Model 3 – Propensity score-matched sample.
Model 4 – Heckman two-stage regression.
S. Hossain et al./Accounting and Finance
*, ** and *** represent significant at 10, 5 and 1 percent respectively.

19
The results (not tabulated) indicate that the coefficient of FEMALE for Type I
errors is significant and negative indicating that female audit partners are less
likely to issue a going-concern opinion for a company that survived. In contrast,
the coefficient of FEMALE for Type II errors is not significant (auditor did not
issue a going-concern opinion and the company went bankrupt) indicating that
gender of the auditor is not significantly associated with Type II errors.
4.4.2. Risky clients
Prior research finds that females are more risk averse than males in a variety of
contexts (e.g. Hinz et al., 1997; Byrnes et al., 1999; Dwyer et al., 2002). There is
evidence that female auditors are more risk averse than male auditors (Hardies
et al., 2016). Auditors also lower their thresholds for issuing a going-concern
opinion in the face of increased uncertainties and risks (Krishnan and Krishnan,
1996; Francis and Krishnan, 1999). Risky clients are likely to be those with high
leverage, a loss 2 years in a row or those with a high bankruptcy score. Therefore,
we reran Equation (1) including an interaction term for FEMALE*LEVERAGE.
We also included interactions for FEMALE*PLOSS and FEMALE*BANK-
RUPTCY_SCORE. The coefficients (not tabulated) of the interaction variables
are not significant, indicating that there is no significant difference between female
and male auditors in issuing a going-concern opinion for risky clients.
4.4.3. Important clients
Auditors may compromise their independence in auditing their important

clients and may not issue a going-concern opinion to retain the client (Hardies
et al., 2016). To test whether client importance affects our results, we use audit
fees (CI_PARTNER), non-audit fees (NAS) and total of audit and non-audit
fees (TOTAL) separately to measure client importance to the individual audit
partner. We use ratios of these fees to the individual auditor’s total audit fees
from all clients in a financial year as measures of client importance. We reran
Equation (1) (separately) using the interactions of FEMALE*CI_PARTNER,
FEMALE*NAS and FEMALE*TOTAL. Client importance based on audit fee
and total fee are significant and positive; however, none of the interaction
variables are significantly associated with GCOPINION indicating that client
importance is not driving our results.
4.4.4. Reclassification of financially distressed companies
Consistent with Blay and Geiger (2013), we redefined financial distress as 1

when a company reports both a negative net profit after tax and negative cash
flows from operations in the current year, 0 otherwise.7 This reduces our
7
Following Blay and Geiger (2013), we also excluded firms in the financial industry in
this analysis.
© 2016 AFAANZ
sample to 5,400 firm-year observations. In untabulated results, FEMALE is still

negative and significant (p < 0.001, two-tailed).
4.4.5. Excluding the financial industry
Prior studies (e.g. Behn et al., 2001; Blay and Geiger, 2001, 2013; Carcello
and Neal, 2003; Carey and Simnett, 2006; Geiger and Rama, 2006) exclude
financial companies to eliminate confounding industry effects and to maintain
consistency with financial ratios in financial stress models. We also excluded
financial companies (GICS 4010-4040) and reran Equation (1). This reduces
our sample to 6,430 firm-year observations. In untabulated results, FEMALE is
negative and significant (p < 0.001, two-tailed).
4.4.6. Excluding the mining industry
Mining companies are financially more vulnerable than other companies and
auditors may be more likely to issue going-concern opinions for financial
distressed mining companies (Carey and Simnett, 2006). Thus, we reran our
analysis after excluding companies in the mining industry. Our untabulated
results indicate that FEMALE is negative and significant (p < 0.001, two-tailed).
4.4.7. First-time going-concern opinion
Examining first-time going-concern opinions is a useful test of auditor judgement.

Changing a prior going-concern audit opinion is an exceptional circumstance: a first-
time going-concern opinion represents a reporting decision within that particular
period, as opposed to a continuing going-concern opinion, which may reflect
circumstances relating back to when the first going-concern opinion was issued
(Carey et al., 2012). We reran Equation (1) to investigate whether female audit
partners are more conservative in issuing first-time going-concern opinions. The
results (not tabulated) indicate that FEMALE is significantly and negatively
associated (p = 0.022, two-tailed) with first-time going-concern opinions. The results
are consistent regardless of whether we use a PSM sample or the Heckman method.
4.4.8. Conservative audit clients
DeFond et al. (2016) find that conservative audit clients are less likely to
receive a going opinion. We reran Equation (1) using an additional control
variable, CONSERVATIVE,8 which equals 1 if the client reports negative
8
We excluded this control variable from our main model because our GCOPINION
model is for financially distressed clients. We calculated discretionary accruals by
including distressed and non-distressed companies using Kothari et al. (2005) perfor-
mance-adjusted modified Jones (1991) model after excluding firms in the financial
industry (n = 11,459).
© 2016 AFAANZ
discretionary accruals in the current year, and 0 otherwise. The results (not
tabulated) indicate that FEMALE is significantly and negatively associated
with GCOPINION (p = 0.011, two-tailed).
4.4.9. Big 4 vs non-Big 4 auditors
The descriptive statistics in Table 3 show that there is a significant

difference between female and male audit partner representation within Big 4
and non-Big 4 audit firms. To identify whether female audit partners in Big
4 audit firms behave similarly to female audit partners in non-Big 4 audit
firms, we split the sample into two subsamples based on audit firm type. Our
untabulated results indicate that female audit partners of Big 4 audit firms
(p < 0.001, two-tailed) and non-Big 4 audit firms (p = 0.060, two-tailed) are
less likely to GCOPINION for financially distressed clients than male audit
partners. In issuing a going-concern opinion for a financially distressed
client, female audit partners behave similarly regardless of the type of audit
firm.
4.4.10. Alternative audit opinion prediction model
To determine whether our findings are sensitive to our opinion model, we

replicated Carey and Simnett’s (2006) model by excluding our additional
control variables. The results (not tabulated) indicate that FEMALE is
significant and negative (p < 0.001, two-tailed). Thus, the results are robust
using a different opinion model.
We also reran our analysis using the two-stage model following Xu et al.
(2013) developed by Krishnan and Krishnan (1996) and adapted by Fargher
and Jiang (2008). This approach decomposes the probability of observing a
going-concern opinion into two components: (i) the probability that the client
is a likely recipient of a going-concern opinion based on observable risk
characteristics, and (ii) the probability that the auditor issues a going-concern
opinion given that the client is a likely recipient of a going-concern opinion
(Fargher and Jiang, 2008). In stage 1, we model the likelihood that the client is
a potential recipient of a going-concern opinion using probit regression
(including all observations available after excluding observations from the
financial industry, n = 11,186). In stage 2, we run a logistic regression using an
indicator variable that is coded 1 if the client receives a going-concern opinion
given that a potential modification was identified from the first stage, 0
otherwise. In the second-stage regression, FEMALE is significantly and
negatively associated (untabulated) with GCOPINION (p = 0.005, two-tailed)
indicating that female audit partners are less likely to issue a going-concern
opinion.
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4.4.11. Effects of the Global Financial Crisis
Although Australia was not significantly affected by the Global Financial

Crisis (GFC),9 there are reports that auditors issued more going-concern
opinions following the world economic trends during the GFC in 2008 and
2009 (e.g. Xu et al., 2011). In response to this changing trend for issuing going-
concern opinions, we first excluded years 2008 and 2009 separately and then,
we excluded both years together and reran Equation (1). The results (not
tabulated) are qualitatively similar, indicating that our findings are not
influenced by the effect of the GFC.
5. Discretionary accruals as a measure of audit quality
Many prior studies also use discretionary accruals as a measure of audit

quality (e.g. Carey and Simnett, 2006; Chen et al., 2008; Chin and Chi, 2008;
Chi et al., 2012; Ittonen et al., 2013; Karjalainen et al., 2013; Hardies et al.,
2016). Chin and Chi (2008), Karjalainen et al. (2013), Ittonen et al. (2013) and
Hardies et al. (2016) report a significant negative association between female
audit partner and discretionary accruals, thus indicating that female audit
partners are associated with higher audit quality. Therefore, for completeness
we also report untabulated results using performance-adjusted discretionary
accruals as a measure of audit quality. We use the following modified Jones
(1991) model adopted from Kothari et al. (2005) to estimate discretionary
accrual, estimating the model for each industry by year using two-digit Global
Industry Classification Standards (GICS) (other than Metals and Mining,
which is six-digit):
DACCt ¼ TACCt ½b1 ð1=TAt1 Þ þ b2 ðDSALESt DARt Þ þ b3 PPEt

þ b4 ROAt1 :
ð5Þ
where DACCt is the discretionary accruals; TACCt is total accruals,

calculated as the difference between earnings before interest and taxes and
cash flow from operations; DSALESt is the change in sales revenue from the
previous year; DARt is the change in account receivable from the previous
year; PPEt is the gross value of property, plant and equipment; and ROAt-1
is the rate of return on assets in the previous year. We calculated
discretionary accruals by including distressed and non-distressed companies
9
An article published in the Sydney Morning Herald mentioned the widespread fear
that Australia may be affected by the GFC; however, the recession on the scale feared
never happened in Australia (Zappone, 2009). ‘Australia dodges recession’, The Sydney
Morning Herald, 06.03.2009. For academic commentary, see Pomfret (2009) and Hill
(2012).
© 2016 AFAANZ
using the Kothari et al. (2005) performance-adjusted modified Jones

(1991) model after excluding firms in the financial industry (n = 11,459).
Other than ROAt-1, all variables are scaled by total assets (TA). Consistent
with Chi et al. (2012), all continuous variables are winsorised at their first
and 99th percentiles, respectively, before estimating the discretionary
accruals.
Following prior studies (e.g. Carey and Simnett, 2006; Chen et al., 2008; Chi
et al., 2012) and controlling for additional audit partner-level characteristics,
we estimate the following model in examining the association between
discretionary accruals and auditor gender:
DACCRUALS ¼ a0 þ a1 FEMALE þ a2 BIG4

þ a3 BANKRUPTCYS CORE þ a4 GCOPINION
þ a5 SIZE þ a6 LEVERAGE þ a7 PLOSS þ a8 FEERATIO
þ a9 PERFORM þ a10 LnAGE þ a11 SG ROWTH
þ a12 CASHFLOW þ a13 MINING þ a14 APT ENURE
þ a15 PI NDS PECLST þ a16 CIF IRM þ a17 CIP ARTNER þ
ð6Þ
where DACCRUALS = alternative measures of discretionary accruals

(absolute, positive and negative); PERFORM = earnings before tax over
total assets at the end of the fiscal year; G_SALES = change in sales from
prior year. All other variables are as previously defined in Appendix I. The
control variables in Equation (6) are based on prior studies that examine audit
quality using abnormal accruals (e.g. Frankel et al., 2002; Johnson et al., 2002;
Myers et al., 2003; Carey and Simnett, 2006). We also include the following
partner-level variables: P_IND_SPECLST, CI_FIRM and CI_PARTNER.
In our untabulated results, we do not find a significant association between
FEMALE and the absolute value of discretionary accruals (p = 0.784).
FEMALE is also not significantly associated with either positive (p = 0.449)
or negative (0.819) discretionary accruals. Our results are not consistent with
Chin and Chi (2008), Karjalainen et al. (2013), Ittonen et al. (2013) or Hardies
et al. (2016), who report a significant negative association between female audit
partner and discretionary accruals.
6. Summary and conclusions
Using data for a sample of publicly listed Australian companies, we

investigate whether auditor gender affects audit outcomes, specifically, going-
concern opinion for financially distressed clients, in an environment where the
audit partner is personally identified and he or she personally signs the audit
report. Prior studies argue that there are behavioural differences between
© 2016 AFAANZ
females and males such as: females are more conservative and risk averse (Hinz
et al., 1997; Byrnes et al., 1999; Dwyer et al., 2002), are more detailed
information processors who process more of the available information cues and
rely less on heuristics (Meyers-Levy, 1986) and apply higher ethical standards
in decision-making (Ford and Richardson, 1994; Ambrose and Schminke,
1999; Thorne et al., 2003). Regulators, as well as the academic literature,
suggest that specific audit partner attributes such as skills and personal
qualities are important determinants of audit quality (Church et al., 2008).
Although both female and male auditors receive the same level of education
and training with the expectation that they would make similar audit
judgments, female audit partners may be more conservative and risk averse
than male audit partners. If female audit partners are more risk averse and
conservative or more detailed information processors, this may result in
different decision-making outcomes to their male counterparts when issuing
the audit opinion. Hence, our study explicitly positions audit partner gender as
a variable of interest.
Our results indicate that female audit partners are less to likely to issue a
going-concern opinion for a financially distressed client, thus suggesting that
female audit partners are associated with lower audit quality. Our findings
provide evidence of differential audit outcomes dependent on the gender of the
audit partner, but our findings are contrary to those reported by Chin and Chi
(2008), Karjalainen et al. (2013), Ittonen et al. (2013) and Hardies et al.
(2016), which find that female auditors are associated with higher audit
quality. Our results may differ from these studies because they were conducted
in other jurisdictions with different capital market settings and audit
environments that have the potential to impact on audit decision-making.
For example, Chin and Chi (2008) use data from Taiwan where audit firms
must be formed as unlimited liability partnerships or proprietorships. By
contrast, we use Australian data where audit firms are formed as limited
liability partnerships or companies and there is a statutory cap for auditor
civil liability to third parties. The effect of gender on decision-making may
vary across such different liability regimes because of gender-based risk-taking
traits that have been found in prior gender research. Future research could
explore this using samples that come from different liability regimes. Hardies
et al. (2016) use a sample of private Belgian companies; however, private firms
are not subject to the same regulatory oversight and public scrutiny and this
may have affected their results. By contrast, our data are for publicly listed
Australian listed firms where the identified lead audit partner is responsible for
making audit decisions, determining the audit opinion to be issued to the
client and signing the audit report. This higher level of public and regulatory
scrutiny may impact on the relation between gender and auditor decision-
making.
The association between audit partner gender and audit quality may have
implications for financial reporting and audit quality. Research that informs
© 2016 AFAANZ
how auditors make decisions and the impact of individual characteristics on

audit quality is informative and contributes to the debate about what auditor
characteristics should be disclosed in an audit report, for example audit partner
identity. Our findings may also have implications for audit practice. For
example, the gender of the lead audit partner could be one of the items that is
taken into consideration by the reviewing partner when assessing the audit
work papers and audit opinion decision.
The findings of our study identify avenues for future research. Future
research might be able to obtain a sample of both private and publicly listed
companies from the same country, which would allow an examination of
whether the effects of gender differ between private and publicly listed
companies under the same regulatory and liability regime. Different cultural
settings may affect the impact of gender on decision-making. Future studies
could investigate this as a possible explanation using data from different
countries with cultural differences that are related to gender. In addition,
future research could consider the gender of the CEO, CFO, female
representation on the board as well as on the audit committee and investigate
their effects on audit partner choice. As noted earlier, there is substantial
accounting researcher interest on the impact of gender-diverse boards and
audit committees on business and reporting decisions. Finally, future research
could investigate the effect of other audit partner characteristics on audit
quality.
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Appendix I
Dependent variable
GCOPINION 1 if the auditor issues a going-concern opinion for a financially
distressed client in the current year, 0 otherwise
Test variable
FEMALE 1 if the audit engagement partner is female, 0 otherwise
Control variables
PQUAL 1 if the auditor issued a modified opinion in the previous year, 0
otherwise
BANKRUPTCY_SCORE Probability of bankruptcy as measured by an adjusted Zmijewski
score1010Consistent with Carcello et al. (1995) and Geiger and
Rama (2006), we calculated a Zmijewski (1984) score as:
b = 4.803 to 3.6 X (net profit after tax divided by
total assets)
+5.4 X (total liabilities divided by total assets) 0.1 X (current
assets divided by current liabilities)
SIZE Natural log of total assets
LnAGE Natural log of number of years the company has been listed on the
Australian Securities Exchange (ASX)
LEVERAGE Total liabilities divided by total assets
Chg_LEVERAGE Change in leverage during the year
ROA Earnings before interest and taxes divided by total assets;
PLOSS 1 if the client reported loss in the previous year, 0 otherwise
INVESTMENTS Short- and long-term investment securities (including cash and cash
equivalents) divided by total assets
BIG4 1 if the auditor is a Big 4 audit firm, 0 otherwise
FEERATIO Non-audit fees divided by the total of audit and non-audit fees
CASHFLOW Net operating cash flow deflated by total assets
MINING 1 if the company is in the mining industry, 0 otherwise
AP_TENURE Number of years the audit partner has audited the current auditee
P_IND_SPECLST 1 if an audit partner is an industry specialist based on the highest
amount of audit fees in the industry, 0 otherwise
CI_FIRM Dollar amount of audit fees from an individual audit client divided
by the total audit fees for an audit firm
(continued)
© 2016 AFAANZ
CI_PARTNER Dollar amount of audit fees from an individual audit client divided
by the total audit fees for an audit partner’s portfolio
AP_CHANGE 1 if there is a change of an audit partner, 0 otherwise
INITIAL 1 if the audit partner engagement is in their first year, 0 otherwise
MODI_CHANGE 1 if an audit partner was changed after issuing a modified opinion in
the previous year, 0 otherwise
RETURN Firm’s stock return over the fiscal year
BETA Firm’s beta estimated using a market model over the fiscal year
VOLATILITY Variance of the residual from the market model over the fiscal year
UNEXP_AF 1 if there is a positive unexpected audit fee for the year, 0
otherwise1111We use a standard audit fee model to calculate
unexpected audit fee. Unexpected audit fee is the difference
between the estimated audit fee and actual audit fee.
REP_LAG Number of days between fiscal year-end and the audit report date
NUM_CLIENTS Number of listed clients an audit partner audited in a particular year
AUDITFORCE Total number of female audit partners within each audit firm
NAS Dollar amount of non-audit fees from an individual audit client
divided by the total non-audit fees for an audit partner’s portfolio
TOTAL Dollar amount of audit and non-audit fees from an individual audit
client divided by the total audit and non-audit fees for an audit
partner’s portfolio
IMR Inverse Mill’s ratio estimated from the stage one in the Heckman
two-stage model
Appendix II
Results for propensity score matching and Heckman first stage
Panel A: Stage-one model with FEMALE as the dependent variable
PSM first stage Heckman first stage

Variable Coefficient (z) Coefficient (z)
Intercept 0.385 (0.53) 0.389*** (2.668)

PQUAL 0.324* (1.89) 0.300*** (6.222)
BANKRUPTCY_SCORE 0.009 (0.84) 0.007*** (4.439)
SIZE 0.117*** (3.35) 0.033*** (4.750)
LnAGE 0.056 (0.79) 0.005 (0.486)
LEVERAGE 0.024* (1.68) 0.005*** (3.185)
Chg_LEVERAGE 0.012* (1.77) 0.001 (1.187)
ROA 0.084 (1.38) 0.002 (0.359)
PLOSS 0.084 (0.58) 0.060** (2.436)
INVESTMENTS 0.009 (0.31) 0.139*** (4.767)
BIG4 1.151*** (8.61) 0.018 (0.429)
FEERATIO 0.548* (1.828) 0.005 (0.153)
(continued)
© 2016 AFAANZ
Appendix II (continued)
Panel A: Stage-one model with FEMALE as the dependent variable
PSM first stage Heckman first stage

Variable Coefficient (z) Coefficient (z)
CASHFLOW 0.126** (1.99) 0.005 (0.380)

MINING 0.209* (1.73) 0.063*** (3.205)
AP_TENURE 0.033 (1.10) 0.002 (0.448)
P_IND_SPECLST 0.664*** (2.61) 0.053 (1.592)
CI_FIRM 0.526 (1.33) 0.023 (0.541)
CI_PARTNER 0.142 (0.66) 0.044 (1.336)
AP_CHANGE 0.409* (1.67) 0.025 (0.703)
INITIAL 0.012 (0.05) 0.018 (0.552)
MODI_CHANGE 0.156 (0.60) 0.030 (0.930)
RETURN 0.001 (1.48) 0.000 (0.301)
BETA 0.021 (0.84) 0.001 (0.239)
VOLATILITY 0.001 (1.04) 0.000 (0.206)
UNEXP_AF 0.167 (1.456) 0.051*** (2.943)
REP_LAG 0.005* (1.65) 0.002*** (3.120)
NUM_CLIENTS 0.123*** (7.38) 0.001 (0.606)
AUDITFORCE 0.005* (1.755)
Year effects Yes Yes
Firm fixed effects Yes Yes
N 7,361 7,361
LR v2(20) 325.540 360.550
Prob > v2 <0.001 <0.001
Pseudo R2 0.1096 0.002
Panel B Mean differences for each matching variable stage one in PSM
Mean t-test
Parameter Treated Control %bias t-stat p-value
PQUAL 0.194 0.186 1.900 0.280 0.781

BANKRUPTCY_SCORE 2.360 2.602 4.000 0.620 0.536
SIZE 16.845 16.857 0.600 0.090 0.932
LnAGE 2.188 2.224 4.700 0.670 0.501
LEVERAGE 1.178 1.588 4.100 1.050 0.292
Chg_LEVERAGE 0.836 1.010 0.700 0.330 0.745
ROA 1.205 1.247 3.200 0.430 0.667
PLOSS 0.774 0.779 1.300 0.170 0.861
INVESTMENTS 0.325 0.920 7.500 0.910 0.363
BIG4 0.686 0.673 2.800 0.390 0.696
FEERATIO 0.169 0.151 9.200 1.340 0.180
CASHFLOW 1.122 1.124 0.200 0.020 0.980
MINING 0.356 0.332 5.000 0.690 0.490
AP_TENURE 2.662 2.633 1.500 0.220 0.824
P_IND_SPECLST 0.053 0.048 2.300 0.330 0.740
(continued)
© 2016 AFAANZ
Appendix II (continued)
Panel B Mean differences for each matching variable stage one in PSM
Mean t-test
Parameter Treated Control %bias t-stat p-value
CI_FIRM 0.041 0.046 2.900 0.470 0.642

CI_PARTNER 0.325 0.346 6.500 0.850 0.398
AP_CHANGE 0.388 0.367 4.500 0.600 0.548
INITIAL 0.394 0.386 1.700 0.220 0.823
MODI_CHANGE 0.077 0.077 0.000 0.000 0.928
RETURN 12.988 9.987 2.700 0.520 0.602
BETA 1.529 1.399 4.600 0.860 0.391
VOLATILITY 61.688 57.019 6.400 1.510 0.132
UNEXP_AF 0.465 0.452 2.700 0.370 0.715
REP_LAG 77.832 79.497 7.200 0.930 0.351
NUM_CLIENTS 4.859 4.540 4.500 1.260 0.208

*, ** and *** represent significant at 10, 5 and 1 percent, respectively.
© 2016 AFAANZ

Does Auditor Gender Affect Issuing Going-Concern Decisions For Financially Distressed Clients?

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Does Auditor Gender Affect Issuing Going-Concern Decisions For Financially Distressed Clients?

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Accounting and Finance

Does auditor gender aﬀect issuing going-concern

Sarowar Hossaina, Larelle Chappleb, Gary S. Monroea

We investigate whether an audit partner’s gender is associated with the

Key words: Auditor gender; Audit quality; Going-concern opinion

JEL classiﬁcation: M41, M42, M48

Using data for publicly listed Australian companies, we examine whether

client. Auditor judgement is complex because the results of audit testing

companies and there is a statutory cap on auditor civil liability to third

represented by the issuance of a going-concern opinion for a ﬁnancially

2. Prior research and hypothesis development

2.1. Gender in corporate governance

The accounting literature demonstrates substantial interest in gender as an

Women in senior management positions have a higher propensity to comply

2.2. Gender in auditing judgement

In the auditing literature, judgement and decision-making research provide

identify a direct association between the proportion of female directors on

H: There is a signiﬁcant association between audit partner gender and the

3. Research design and method

3.1. Sample selection

Number of ﬁrm-year observations 14,823

GICS code (Industry) Frequency Percentage

10 (Energy) 885 12.02

sample), and as explained below, we use this industry sector in constructing a

We ﬁrst test our hypothesis by estimating the coeﬃcients using a standard

Full sample Female

Total Assets ($M) 1,020.00 18,600.00 4,070.00 849.00 3.329 0.001

See Appendix I for variable deﬁnitions.

issuing a going-concern opinion to a ﬁnancially distressed client. Our choice of

GCOPINION ¼ a0 þ a1 FEMALE þ a2 PQAUL

FEMALE ¼ a0 þ a1 PQAUL þ a2 BANKRUPTCYS CORE þ a3 SIZE

FEMALE ¼ a0 þ a1 AUDITFORCE þ a2 PQAUL

See Appendix I for variable deﬁnitions.

The variable of interest is FEMALE deﬁned as 1 if the audit engagement partner

partner-level variables, that is P_IND_SPECLST, CI_FIRM, CI_PARTNER

4.1. Descriptive statistics

4.2. Female audit partners over the sample period

4.3. Multivariate results

opinions for a ﬁnancially distressed company, which suggests female audit

4.4. Robustness checks

4.4.1. Type I and Type II audit errors

Predicting bankruptcy is not the objective of an audit, although the failure to

ERROR ¼ a0 þ a1 FEMALE þ a2 PQAUL þ a3 BANKRUPTCYS CORE

See Appendix I for variable deﬁnitions.

Logistic regression results for going-concern opinions issued during 2003–2011

Model 1† Model 2‡ Model 3§ Model 4¶

Intercept ? 1.421*** (2.87) 1.332*** (2.69) 0.443 (0.26) 0.865*** (2.686)

AP_CHANGE ? 0.236 (1.57) 0.217 (1.45) 0.166 (0.32) 0.133 (1.543)

Model 1† Model 2‡ Model 3§ Model 4¶

REP_LAG + 0.366*** (5.08) 0.365*** (5.07) 0.011** (2.28) 0.011*** (6.667)

*, ** and *** represent signiﬁcant at 10, 5 and 1 percent respectively.

4.4.2. Risky clients

4.4.3. Important clients

Auditors may compromise their independence in auditing their important

Consistent with Blay and Geiger (2013), we redeﬁned ﬁnancial distress as 1

sample to 5,400 ﬁrm-year observations. In untabulated results, FEMALE is still

4.4.5. Excluding the ﬁnancial industry

4.4.6. Excluding the mining industry

4.4.7. First-time going-concern opinion

Examining ﬁrst-time going-concern opinions is a useful test of auditor judgement.

4.4.8. Conservative audit clients

4.4.9. Big 4 vs non-Big 4 auditors

The descriptive statistics in Table 3 show that there is a signiﬁcant

Intercept ? 1.421* (2.87) 1.332* (2.69) 0.443 (0.26) 0.865*** (2.686)

REP_LAG + 0.366* (5.08) 0.365* (5.07) 0.011 (2.28) 0.011* (6.667)

, and represent signiﬁcant at 10, 5 and 1 percent respectively.