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Do (Fe)Male Auditors Impair Audit Quality? Evidence from Going-Concern

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Article  in  European Accounting Review · March 2016

DOI: 10.1080/09638180.2014.921445

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 Do (Fe)Male Auditors Impair Audit Quality?
Evidence from Going-Concern Opinions

Kris Hardies a, 1, Diane Breesch b, and Joël Branson b

a
Department of Accounting and Finance, University of Antwerp, Prinsstraat 13, 2000
Antwerp, Belgium
b
Faculty of Economic, Social and Political Sciences, and Solvay Business School, Vrije
Universiteit Brussel, Pleinlaan 2, 1050 Brussels, Belgium

European Accounting Review (forthcoming)

Acknowledgments
We would like to thank Ann Vanstraelen (the associate editor), two anonymous reviewers,
Marleen Willekens, Alison Woodward, Bruno Heyndels, Will Ciconte, Jean C. Bedard, and
W. Robert Knechel for comments on an earlier version of this paper. This paper has also
benefited from the comments of the participants of the 34th Annual Congress of the European
Accounting Association (2011) and the workshop participants at the Université Catholique de
Louvain, Belgium (2010). We also thank Eric Van den Broele (Graydon Belgium), Marloes
Beijer, and Valerie Henrion for their assistance in collecting data.

1
Corresponding author. Tel.: +32 (0) 3 265 40 43.

E-mail address: kris.hardies@uantwerpen.be (K. Hardies).

Electronic copy available at: http://ssrn.com/abstract=1583206

 Do (Fe)Male Auditors Impair Audit Quality?
Evidence from Going-Concern Opinions

ABSTRACT:

Recent research indicates that there may be a relationship between the characteristics of

the audit engagement partner and audit quality. In this paper, we examine the

relationship between audit quality and the presence of a female or male audit

engagement partner. We use the likelihood that an auditor issues a going-concern

opinion (GCO), conditional on the client’s financial situation, as an indicator of audit

quality. Using a sample of 7,105 financially distressed, private Belgian companies, we

find that female auditors are, ceteris paribus, more likely to issue GCOs than male

auditors. Our results also show that this effect is stronger when clients are either

important (i.e., represent a material portion of the auditor’s revenues) or high-risk (i.e.,

associated with increased uncertainties and risks). Collectively, these results indicate

higher audit quality by female auditors.

Keywords: audit quality; auditor independence; going-concern opinions; gender; sex

differences.

Data Availability: The data are publicly available from the sources identified in the

paper.

Electronic copy available at: http://ssrn.com/abstract=1583206

1. Introduction

This study examines the relationship between audit quality and the presence of a female

or male auditor (i.e., auditor sex). Extant studies have examined audit quality

differentiation at the audit firm level (see Francis, 2004, 2011). As suggested by

DeFond and Francis (2005), more recent research has moved beyond the analysis of

audit firms into the direction of individual audit practices. Because auditing is, to a large

extent, a matter of professional judgment, it is unlikely that audit quality within audit

firms is homogeneous. Hence, it is likely that audit quality is mediated or moderated by

various characteristics of individual auditors.

We focus on auditor sex in this study because sex is likely to be an audit partner

characteristic that affects audit quality. As recently noted by Birnberg (2011: 6),

research from outside the accounting domain strongly suggests that sex differences may

be an issue worth considering in accounting research because ‘studies have reported

significant gender-related differences in areas such as risk taking.’ A small number of

behavioral accounting studies confirm that such sex differences are indeed able to

impact audit judgments (e.g., Chung and Monroe, 2001; Gold et al., 2009). If such

differences are also present outside the laboratory, they might ultimately impact audit

quality. The question of whether audit quality is affected by auditor sex is also of

interest because a number of recent studies indicate that companies with female senior

executives and board members have higher financial reporting quality (e.g., Barua et al.,

2010; Srinidhi et al., 2011). Analogously, audit quality may be higher for companies

with female audit engagement partners.

Following prior studies (e.g., Knechel and Vanstraelen, 2007; Ruiz-Barbadillo,

2004), we measure audit quality by examining the likelihood of an auditor issuing a

1
going-concern opinion (GCO) to a financially distressed company; the likelihood of

issuing a GCO, conditional on the client’s financial situation, is positively correlated

with auditor independence (and thus audit quality). We expect that, ceteris paribus,

female auditors are more likely to issue GCOs to financially distressed clients than male

auditors. Female auditors are less influenced by unverified client-provided explanations

(Gold et al., 2009), exhibit lower intentions to engage in audit quality reduction

behaviors (Sweeney et al., 2010), are less concerned with the commercial side of

auditing (Jonnergård et al., 2010), and are generally more ethical (e.g., Bernardi and

Arnold, 1997). We therefore suggest that the behavior of female auditors is more

aligned with the quality-orientated aspect of the audit profession (i.e., serving the public

interest), whereas the behavior of male auditors is more aligned with the revenue-

orientated aspect of the profession (i.e., providing good business for their firms). Hence,

we expect female auditors to be less likely to impair their independence to retain clients.

Additionally, we examine if there are circumstances in which female or male auditors

adjust their “thresholds” (i.e., become more/less conservative) for issuing GCOs.

Specifically, we predict that female auditors will be more likely to issue GCOs to

financially distressed clients than male auditors when (1) those clients represent a

material portion of the auditor’s revenue (i.e., important clients) and (2) those clients are

associated with increased uncertainties and risk (i.e., high-risk clients). First, it seems

reasonable to assume that auditors who are willing to compromise their independence

are more likely to do so for important clients. We expect male auditors to increase their

thresholds more than female auditors when deciding whether a GCO is appropriate for a

client when that client is important. Second, there is ample evidence that women are

more risk-averse than men in a variety of contexts (see Croson and Gneezy, 2009). We

2
therefore expect female auditors to lower their thresholds more than male auditors when

deciding whether a GCO is appropriate for a client when that client is high-risk.

We use a sample of 7,105 financially distressed, private Belgian companies for our

empirical analysis. Our results show that female auditors are, ceteris paribus, more

likely to issue GCOs to financially distressed companies than male auditors. Moreover,

we find that female auditors are more likely to issue GCOs to financially distressed

companies than male auditors when those companies are either important or high-risk

clients. In supplementary analyses, we also provide some evidence that the reporting

decisions of female auditors are more accurate. Collectively, these results indicate

higher audit quality by female auditors because they are less likely to impair their

independence and are more risk-averse.

These results contribute to the literature in three ways. First, our results add to the

growing body of literature that recognizes that there can be audit quality differentiation

within audit firms (e.g., Chen et al., 2010; Francis and Yu, 2009) by showing that

individual auditor characteristics influence the likelihood that a GCO is issued. Second,

our results contribute to the limited but growing literature on sex-differentiated audit

judgments and decisions (e.g., Chin and Chi, 2008; Gold et al., 2009; Hardies et al.,

2012). Third, we extend the literature on financial reporting quality and auditing in

private companies (e.g., Hope and Langli, 2010; Knechel and Vanstraelen, 2007), which

constitute the majority of the EU economy and audit services market (Van Tendeloo

and Vanstraelen, 2008).

2. Literature Review and Hypothesis Development

2.1 Audit Quality and the Audit Opinion

3
Audit quality has traditionally been assumed to be the result of auditor competence and

independence (DeAngelo, 1981). Because audit quality is unobservable, researchers

have used various surrogates or indicators of audit quality, including the extent of

earnings management as measured by accruals (e.g., Reichelt and Wang, 2010) and the

likelihood of issuing GCOs (e.g., DeFond et al., 2002; Knechel and Vanstraelen,

2007).1 Auditors should issue an unmodified audit opinion (i.e., an unqualified or

“clean” opinion) when they conclude that a company’s financial statements are

prepared, in all material respects, in accordance with the applicable financial reporting

framework (i.e., give a “true and fair view”). A fundamental principle in the preparation

of financial statements is the going-concern assumption (i.e., the assumption that an

entity will continue to operate for one year beyond the financial statement date). When

there is significant doubt about the appropriateness of the use of the going-concern

assumption, the auditor should issue a GCO.

Auditors face two sets of economic incentives when evaluating the going-concern

assumption. First, if they issue a GCO to a client that does not subsequently fail (i.e., a

Type I error), auditors may lose that client (and related future quasi-rents). Clients are

more likely to switch auditors after the receipt of a GCO (e.g., Geiger et al., 1998;

Carcello and Neal, 2003). Second, auditors failing to issue a GCO to a client that

subsequently files for bankruptcy (i.e., a Type II error) risk exposure to litigation costs

and loss of reputation (e.g., Carcello and Palmrose, 1994; Krishnan and Krishnan,

1996). Although potential litigation and reputational costs act as safeguards against the

unwarranted issuing of unmodified opinions by the auditor, the potential to lose clients

acts as an incentive to issue unwarranted unmodified opinions. In order to avoid client

losses, a less independent auditor is, ceteris paribus, less likely to issue a GCO when

4
such an opinion is in fact warranted (DeAngelo, 1981). In issuing an audit opinion, the

auditor must objectively evaluate a company’s financial reporting and withstand client

pressure to issue a clean opinion (Carcello and Neal, 2000; DeFond et al., 2002). This

suggests a correlation between auditor independence (and thus audit quality) and the

likelihood that an auditor issues a GCO, conditional on the client’s financial situation.

2.2 Sex of the Audit Engagement Partner

As suggested by DeFond and Francis (2005), recent research has moved beyond the

analysis of audit firms into the direction of individual audit practices. The review of

Church et al. (2008) on the auditor’s reporting model suggests that the audit process is

indeed affected by the specific auditor who performs a task. Moreover, the relationship

between the audit engagement partner and the audit client may be as critical as the

relationship between the audit firm and the client when considering auditor

independence (Miller, 1992; Wallman, 1996). Independence depends largely on

judgments made by audit partners (AICPA, 1993: 44). Audit engagement partners plan

and implement the engagement and ultimately determine the type of audit opinion to be

issued to the client (Chin and Chi, 2009; Reichelt and Wang, 2010). Hence, there are

good reasons to ‘investigate whether there is a correlation or systematic relationship

between individual characteristics (e.g., age, gender, personality, and appearance) and

the recommended report’, as suggested by Church et al. (2008: 75).

Very recently, some explanatory studies (Breesch and Branson, 2009; Chin and Chi,

2008; Gold et al., 2009; Ittonen and Peni, 2012) have identified sex as a possible

individual characteristic worthy of examination. Breesch and Branson (2009) and Chin

and Chi (2008) both examined whether there is a difference in the likelihood of issuing

5
modified audit opinions between female and male auditors. In an experiment, Breesch

and Branson (2009) found no difference in the severity of the audit opinions issued by

female and male auditors. Using a sample of 19,331 Taiwanese companies, Chin and

Chi (2008), however, found evidence that clients were more likely to receive a GCO

when both the leading and concurring auditors were female. Whether these findings can

be generalized beyond institutional settings where joint-audits are mandatory and how

these results are to be explained is, however, unclear. Nevertheless, there are reasons to

believe that audit quality may indeed be systematically related to auditor sex.

Although it is unknown how individual partners address the trade-off between

individual losses or benefits and the loss of quasi-rents for partnership as a whole

(Simunic, 2003), engagement partners often have “the perception” that the development

or maintenance of clients will lead to career advancement and that losing a client will

severely damage their career (Miller, 1992).2 There are reasons to belief that female

auditors are less likely to impair their independence to retain clients. It has been argued

that partners in large audit firms have lost their focus on audit quality (Zeff, 2003) and

the client service discourse bears little connection with issues of independence, public

service, or ethical standards (Anderson-Gough et al., 2000). Based on a recent study by

Pierce and Sweeney (2010), it appears that male trainee accountants perceive more

encouragement to engage in unethical behaviors, a more unethical “tone at the top”, and

greater pressure to engage in unethical behaviors to achieve success and profitability for

the firm.3 Given that men’s identities are more connected with their employment, men

may be more susceptible to such influences, even when they personally disapprove of

them (e.g., Gerson, 1993). Therefore, it is mostly male auditors who succumb to the

commercial values (e.g., maximize profitability) celebrated by their audit firms.

6
Although female audit partners are “insiders” (by the virtue of being an audit partner),

their “outsider” status as women simultaneously marginalizes them, thus insulating

them from the temptation to participate (Martin, 2006). This arguably explains why

female auditors appear to prioritize audit quality above cost reduction and ambition to

increase their business or profitability (i.e., are less concerned with the commercial side

of auditing) (Jonnergård et al., 2010). Moreover, certainly at the partner level, audit

firms make use of performance-related pay schemes and the job satisfaction of men is

influenced more by pay than that of women (e.g., Sloane and Williams, 2000).

Additionally, female auditors also exhibit significantly lower intentions of engaging in

certain audit quality reduction behaviors (namely over-reliance on client work and

premature sign-offs) that could lead to reduced auditor independence (Sweeney et al.,

2010). This may be further strengthened by unconscious preferences given that Gold et

al. (2009) found that male auditors were more influenced by unverified client-provided

explanations than female auditors. Accounting researchers have also regularly

documented women to be more ethical in their perceptions of ethical conduct as well as

in their actual behavior (e.g., Bernardi and Arnold, 1997; McManus and Subramaniam,

2009). In their review on ethical decision-making, O’Fallon and Butterfield (2005: 379)

concluded that although many studies do not report any differences, ‘when differences

are found, females are more ethical than males.’

As the above discussion suggests, audit quality might be systematically related to

auditor sex.4 Specifically, it is suggested that the behavior of female auditors is more

aligned with the quality-orientated aspect of the audit profession (i.e., serving the public

interest), whereas that of male auditors is more aligned with the revenue-orientated

aspect of the profession (i.e., providing good business for their firms). This suggests that

7
female auditors might be less concerned about losing a client and, as a consequence,

more willing to issue GCOs than their male counterparts. Therefore, we formulate the

following hypothesis:

Hypothesis 1: Female auditors are, ceteris paribus, more likely to issue GCOs than
male auditors.

It seems reasonable to assume that auditors who are willing to compromise their

independence to retain clients will only do so when the audit fee paid by the client is

sufficiently high (i.e., when the utility of the gains exceeds the disutility of the potential

harms). That is, auditors are more likely to impair their independence in auditing their

important clients because 25,000 euros from one client is presumably more important

than 25,000 euros from 10 clients. Therefore, we analyze whether female auditors are

more likely to issue GCOs to clients that represent a material portion of their revenues

than male auditors. This leads to our second hypothesis:

Hypothesis 2: The effect of client importance on the likelihood that an auditor issues
a GCO is, ceteris paribus, smaller for female auditors than for male
auditors.

Although the underlying factor triggering a GCO is a company’s financial condition,

this decision requires considerable judgment (Carcello and Neal, 2000). Previous

studies have shown that auditors lower their thresholds for issuing GCOs (i.e., become

more likely to issue a GCO) in the face of increased uncertainties and risks (e.g., Francis

and Krishnan, 1999; Krishnan and Krishnan, 1996). Such reporting conservatism is

argued to be a rational mechanism through which auditors can achieve a desired level of

audit risk for high-risk clients (Francis and Krishnan, 1999). There is ample evidence

that women are more risk-averse than men in a variety of contexts (see Croson and

8
Gneezy, 2009) and some evidence indicates that female auditors are also more risk-

averse than male auditors (Gold et al. 2009; Hardies et al. 2013). Therefore, in the face

of uncertainties and increased risks, female auditors might lower their thresholds for

issuing a GCO to a greater extent than male auditors. This leads to our third hypothesis:

Hypothesis 3: The effect of client risk on the likelihood that an auditor issues a GCO
is, ceteris paribus, larger for female auditors than for male auditors.

2.3 Belgian Audit Market and Audit Reporting Regulations

According to Belgian audit reporting standards, an auditor needs to ascertain whether

the going-concern assumption is tenable and the extent to which existing going-concern

problems are adequately disclosed.5 A GCO is required if there is a significant

(material) going-concern risk for the foreseeable future (i.e., one year beyond the

financial statement date). If the annual report discloses sufficient and acceptable

justification, the auditor can issue the GCO by means of an explanatory paragraph. If

the auditor deems the disclosures in the annual report to be insufficient or unacceptable,

the auditor can issue a qualified, adverse, or disclaimer of opinion.

Companies in Belgium are required by Company Law to have their financial

statements audited by a registered auditor if they are “large” (i.e., meet certain size

criteria).6 Because the thresholds of these criteria are not that large, many relatively

small companies are legally required to appoint a statutory auditor. In contrast to Anglo-

Saxon markets, demand for audit services is thus not voluntary for many privately held

companies in Belgium. Private companies constitute more than 99% of Belgian

companies that are subject to audit (Willekens and Gaeremynck, 2005). Because

distressed private companies have fewer financing and survival options than distressed

public companies, the incidence of GCOs is generally higher in Belgium than in Anglo-

9
Saxon markets. Although direct comparisons are difficult due to differences in research

design, studies on Belgian data typically report more than 20% of financially distressed

companies receiving a GCO (e.g., Gaeremynck and Willekens, 2003; Knechel and

Vanstraelen, 2007) whereas GCOs typically represent less than 10% of audit opinions in

studies using US data (e.g., DeFond et al. 2002; Reynolds and Francis, 2000).

Despite the high incidence of GCOs in Belgium, auditors in Belgium arguably still

issue more clean opinions than appropriate (Vanstraelen and Willekens, 2008). Potential

litigation costs are of negligible concern to Belgian auditors due to the relative absence

of litigation against auditors in Belgium (Gaeremynck and Willekens, 2003). Compared

to Anglo-Saxon markets, potential reputational costs are also of lesser concern in the

Belgian audit market because most companies are privately held and do not have a

broad shareholder base to which they are accountable (Knechel and Vanstraelen, 2007).

In such an environment, auditors are arguably more susceptible to losing their

independence because incentives work against the issuance of GCOs. As previously

discussed, the issuance of a GCO generally increases the chances of losing a client. This

seems to be a viable threat in the Belgian environment. According to a study by

Carcello et al. (2009), 30% of companies that received a GCO during the period from

2001 to 2002 but did not file for bankruptcy in the following year changed their audit

firm at the next opportunity, compared to an average auditor switch rate of only about

5% (Branson and Breesch, 2004). Therefore, as argued by Hope and Langli (2010), the

combination of low reputation risk (i.e., private companies) and low litigation risk

constitutes an ideal setting to test auditor independence impairment.

3. Research Method and Data

10
3.1 Data

Our analysis was conducted using a sample of 7,105 financially distressed, private

Belgian companies (Table 1). Our sample was developed starting with the entire

population of Belgian companies from 2008 that were subject to examination by an

external auditor (either mandatory or voluntary). There were 16,934 audited private

companies in 2008. We restricted our sample to distressed companies because prior

research has emphasized the importance of conditioning analyses of GCO reporting on

the presence of financial distress (e.g., DeFond et al., 2002; Reynolds and Francis,

2000). Moreover, Belgium’s going-concern audit standard specifically pertains to the

audit of companies experiencing stress (Carcello et al., 2009). We considered a

company to be financially distressed if it exhibited one of the following criteria: (1) an

operational loss, (2) a bottom line loss, (3) negative retained earnings, or (4) negative

working capital (Hopwood et al., 1994; Mutchler et al., 1997). The application of these

criteria yielded a sample of 9,008 companies. We eliminated companies that appointed

more than one auditor (joint-audits), financial institutions, public administrative

institutions, and companies with missing data for the audit opinion. This process yielded

a final sample of 7,105 companies. Data were provided to us by Graydon Belgium, a

provider of credit information, or collected with the cooperation of the Belgian National

Bank, which maintains publicly available archives of financial reports.

[Insert Table 1 around here]

3.2 Estimation Model

Following prior research (e.g., DeFond et al., 2002; Knechel and Vanstraelen, 2007;

Mutchler et al., 1997), we test our hypotheses by estimating Equation (1):

11
 (1) GCOi = α0 + ß1LNSALESi + ß2AGEi + ß3PROBANKFi + ß4LOSSi + ß5BIG4i +
ß6SPECFIRMi + ß7SPECAPi + ß8EXPERIENCEi + ß9LANGi +
ß10PORTFOLIOi + ß11BUSYi + ß12SEXi + ß13CLIENT_IMPi +
ß14SEX*CLIENT_IMPi + ß15CLIENT_RISKi + ß16SEX*CLIENT_RISKi +
ß17INDUSTRY_DUMMIESi + i

GCO is a dummy variable that takes a value of 1 for companies that received a GCO

and 0 otherwise. SEX is our primary test variable and takes a value of 1 for companies

that had a female audit engagement partner and 0 for companies that had a male audit

engagement partner. Hypothesis 1 predicts a positive coefficient for SEX, which would

indicate that female auditors are more likely to issue GCOs.

To test Hypothesis 2, we include the interaction variable SEX*CLIENT_IMP,

whereby CLIENT_IMP measures the economic importance of a client for the auditor.7

Following Chung and Kallapur (2003), client importance is measured as (1) the ratio of

total client fees (audit and non-audit) to the individual auditor’s total revenue from all

clients (CLIENT_FEES), (2) the ratio of a client’s audit fee to the individual auditor’s

total revenue from all clients (CLIENT_AF), or (3) the ratio of a client’s non-audit fees

to the individual auditor’s total revenue from all clients (CLIENT_NAS).8 Negative

coefficients are expected for the different specifications of CLIENT_IMP because the

willingness of auditors to issue a GCO may decrease as their economic dependency on a

client increases (e.g., Vanstraelen, 2002). Hypothesis 2 predicts a negative coefficient

for SEX*CLIENT_IMP, which would indicate that the reporting decisions of female

auditors are less influenced by client importance.9

To test Hypothesis 3, we include the interaction variable SEX*CLIENT_RISK,

whereby CLIENT_RISK measures the extent to which a company is a high-risk client.

Following previous research (e.g., Johnstone and Bedard, 2004; O’Keefe et al., 1994),

we measure risk as (1) total liabilities divided by total assets (LEVERAGE), (2) net

12
income divided by total assets (ROA), or (3) inventory and receivables divided by total

assets (INHRISK). In our analyses, we work with the inverse of ROA (IROA) so that for

all our risk measures, higher values indicate riskier clients. Because auditors are more

likely to issue GCOs to riskier clients, we expect positive coefficients for LEVERAGE,

INHRISK, and IROA. Hypothesis 3 predicts a positive coefficient for

SEX*CLIENT_RISK, which would indicate that the reporting decisions of female

auditors are more influenced by client risk.10

We include control variables for both contributing and mitigating factors found to be

related to auditor GCO decisions. LNSALES represents company size and its coefficient

is expected to be negative because auditors are less likely to issue GCOs to larger

clients (e.g., Knechel and Vanstraelen, 2007; Mutchler et al., 1997). Firm age (AGE) is

included because younger companies are more susceptible to failure and more likely to

receive a GCO (e.g., Dopuch et al., 1987; Knechel and Vanstraelen, 2007). We

therefore expect a negative coefficient for AGE. PROBANKF is the score of a

standardized bankruptcy prediction model developed for Belgian companies.11 We

expect a negative coefficient for PROBANKF because a higher score implies a lower

likelihood of going bankrupt. LOSS is a dummy variable that takes a value of 1 if a

company experienced losses. A positive coefficient is expected for LOSS because losses

are positively related to the likelihood of receiving a GCO (e.g., Reynolds and Francis,

2000). BIG4 is a dummy variable that takes a value of 1 for companies audited by a Big

4 auditor. There is a longstanding tradition in associating audit quality with auditor size

(e.g., DeAngelo, 1981) and Big 4 auditors tend to be more conservative in their opinions

(e.g., Krishnan and Krishnan, 1996). We therefore expect a positive coefficient for

BIG4. SPECFIRM is a dummy variable that takes a value of 1 for companies that are

13
audited by audit firm industry specialists. Following prior research (e.g., Francis et al.,

2005), we classified an audit firm as an auditor specialist in an industry if the audit firm

was the largest supplier in the industry (based on the auditor’s annual market share of

audit fees within a two-digit SIC category). Because previous research has found

auditors to be more likely to issue a GCO when they are industry specialists (e.g., Lim

and Tan, 2008), we expect a positive coefficient for SPECFIRM.

To counter concerns that the results for the variable SEX might be confounding

other individual differences between female and male auditors, we also include

additional variables that capture individual auditor characteristics. Our data allowed the

inclusion of five additional control variables that capture individual auditor attributes.

EXPERIENCE signifies the number of years the company’s auditor has been legally

authorized to sign audit opinions. Auditor experience is an important variable in the

reporting decision (e.g., Shelton, 1999).12 Experimental studies have generally found

more experienced auditors to be more likely to issue unqualified audit opinions (e.g.,

Koch et al., 2012), so we expect a negative coefficient for this variable. LANG is a

dummy variable that takes a value of 1 for companies audited by an auditor with a

French-speaking affiliation.13 We expect a negative coefficient for LANG because

previous research has documented a negative association between audit quality and the

auditor having a French-speaking affiliation (e.g., Willekens and Gaeremynck, 2005).

Because it is still unclear to which extent the deep expertise of office-based

professionals can be captured and distributed within the firm through knowledge

sharing practices (Francis et al., 2005; Reichelt and Wang, 2010), SPECAP is included

to indicate whether the specific audit engagement partner is an industry specialist.

SPECAP takes a value of 1 for companies that are audited by audit partner industry

14
specialists. As in Zerni (2012), we classified an audit partner as an auditor specialist in

an industry if the audit partner was the largest or second-largest supplier in the industry

(based on the audit partner’s annual market share of audit fees within a two-digit SIC

category) and audited at least five clients within that industry. A positive coefficient is

expected for SPECAP because results in Chi and Chin (2011) indicate that clients of

signing auditor specialists are more likely to receive a GCO relative to those of other

auditors. PORTFOLIO is included to control for the size of the client portfolios of

individual audit partners. Audit quality is traditionally associated with auditor size. This

argument may also be applicable on the individual auditor level (DeAngelo, 1981). As

in Zerni (2012), PORTFOLIO is measured as the natural logarithm of audited total

assets and we expect this variable to have a positive coefficient. Additional clients,

however, also decrease the amount of time an audit partner can spend on any

assignment. We therefore include BUSY in our model, which is a dummy variable that

takes a value of 1 for audit partners that are ranked among the top 20% of audit partners

based on the number of audit assignments. Two recent papers found that auditors with a

very large number of audit assignments are significantly less likely to issue GCOs

(Goodwin, 2011; Sundgren and Svanström, 2013) and we therefore expect BUSY to

have a negative coefficient.

Finally, industry controls (two-digit SIC industry indicators;

INDUSTRY_DUMMIES) are added to Equation (1) in order to account for systematic

differences in the riskiness or complexity of the audit function across industries.

4. Primary Results

4.1 Descriptive Statistics

15
Descriptive statistics for all variables used in this study are reported in Table 2. Panel A

presents the results for our full sample of 7,105 companies and for companies that were

audited by female and male auditors separately. Panel B provides a comparison of

means between the companies that received a GCO and the companies that did not.

Table 2 shows that 22% of the companies in our sample received a GCO, which is

consistent with previous research using Belgian data (e.g., Gaeremynck and Willekens,

2003; Knechel and Vanstraelen, 2007). In addition, the mean (median) PROBANKF for

the companies in our sample is 0.527 (0.539). Given that scores lower than 0.531

indicate acute financial problems (Ooghe and Spaenjers, 2005), our sample selection

procedures have identified companies that are most likely to be considered for a

possible GCO by their auditor.

As would be expected, companies receiving a GCO showed, on average, greater

signs of financial distress than companies not receiving a GCO; companies in the GCO-

subsample were unhealthier (PROBANKF: 0.544 vs. 0.467) and had experienced losses

more often (86% vs. 45%). Companies receiving a GCO were also smaller (LNSALES:

12.17 vs. 13.68) and younger (AGE: 16.78 vs. 21.25 years) on average. Furthermore,

companies in the GCO subsample more often had a Big 4 auditor (59% vs. 44%), an

audit firm industry specialist (18% vs. 15%), an audit partner industry specialist (9% vs.

5%), a less experienced audit partner (15.5 years vs. 16.8 years), an audit partner with a

Dutch-speaking affiliation (74% vs. 71%), an audit partner with a larger client portfolio

(21.65 vs. 21.24), and a busy audit partner (68% vs. 57%). These results are mostly as

expected and consistent with previous research. Consistent with expectations,

companies not receiving a GCO were, on average, more important clients (in terms of

the portion of the auditor’s revenues that they present) than companies receiving a GCO

16
(CLIENT_FEES: 3.9% vs. 2.9%; CLIENT_AF: 3.3% vs. 2.4%). Conversely, companies

receiving a GCO were, on average, riskier clients than companies not receiving a GCO

(LEVERAGE: 1.314 vs. 0.704; IROA: 0.1373 vs. –0.0181; INHRISK: 0.1144 vs.

0.1021). Again, this pattern of results is consistent with expectations.

Looking at differences between female and male auditors, we observe some rather

large differences in individual characteristics. Both within the sample of companies not

receiving GCOs and within the sample of companies receiving GCOs, female auditors

were, on average, less likely to be industry specialists (SPECAP), less experienced

(EXPERIENCE), more likely to have a French-speaking affiliation (LANG), more likely

to have smaller client portfolios (PORTFOLIO), and less likely to be ranked among the

top auditors based on the number of assignments (BUSY). This pattern of results

indicates that it might indeed be necessary to control for other individual auditor

characteristics in order to counter potential concerns that the results for the variable SEX

might be confounding other individual differences between female and male auditors.

[Insert Table 2 around here]

4.2 Logistic Regression Results

The Pearson Correlation Matrix for all variables is presented in Table 3. All control

variables are significantly correlated with the type of audit opinion that is issued by the

auditor. Most correlations are, however, weak to negligible. GCO is moderately

positively correlated with LOSS (r = .342; p = .000) and strongly negatively correlated

with PROBANKF (r = –.431; p = .000). Our primary test variable, SEX, is not

significantly correlated with GCO (p = .937). GCO is significantly negatively correlated

with two of our measures for CLIENT_IMP (CLIENT_FEES: r = –.050; p = .000;

17
CLIENT_AF: r = –.054; p = .000). GCO is not significantly correlated with our third

measure for CLIENT_IMP (CLIENT_NAS: r = .004; p = .736). GCO is positively

correlated with our three measures for CLIENT_RISK (LEVERAGE: r = .318; p = .000;

IROA: r = .298; p = .000; INHRISK: r = .028; p = .017). This pattern of results is

reasonably in line with expectations.

[Insert Table 3 around here]

The highest pairwise correlation is .687 and the largest variance inflation factors

(VIF) are less than 2.418.14 Therefore, we conclude that there are no problems with

multicollinearity in the data. The results for the logistic regression models are reported

in Table 4. Model (1) presents a baseline case of our GCO model, which only includes

SEX as a test variable. Models (2)–(7) introduce our various measures of CLIENT_IMP

and CLIENT_RISK in order to test our second and third hypothesis. Our models do a

reasonably good job of explaining GCOs. The likelihood ratio test indicates that all our

models fit the data well (i.e., all the models are significant). The pseudo R2 is 36% or

higher in all models, which is comparable to previous research using US data (e.g.,

DeFond et al. 2002; Reichelt and Wang, 2010) and higher than in previous studies using

Belgian data (e.g., Carcello et al., 2009; Gaeremynck and Willekens, 2003; Vanstraelen,

2002). All control variables are statistically significant and have the predicted

coefficient sign except for SPECFIRM, which has a negative coefficient, and LANG,

which is not significant. In line with previous research, we find that smaller companies

(LNSALES), younger companies (AGE), companies with greater financial distress

(PROBANKF), and companies with losses (LOSS) are more likely to receive a GCO.

Companies are also more likely to receive a GCO when they are audited by Big 4

18
auditors (BIG4), audit partner specialists (SPECAP), less experienced audit partners

(EXPERIENCE), audit partners with larger client portfolios (PORTFOLIO), and

auditors who are not ranked among the top auditors based on the number of assignments

(BUSY).

The results of Model (1) indicate that the likelihood that a company receives a GCO

is, on average, slightly higher for companies with a female audit engagement partner

than for companies with a male audit engagement partner. The coefficient of SEX is also

significant in all other model specifications. Hypothesis 1 is thus supported by our data.

Female auditors are, ceteris paribus, more likely to issue GCOs than male auditors.

In order to test Hypothesis 2, we include our various measures of client importance

(CLIENT_IMP) in Models (2)–(4). The results indicate a negative relationship between

each of our measures of client importance and the likelihood that a company receives a

GCO. That is, the odds of receiving a GCO decrease as client importance increases.

Although the results are somewhat weaker when client importance is measured in terms

of non-audit fee revenues (Model (4)), it is clear that auditors are less likely to issue

GCOs to clients that represent a material proportion of their revenues. The coefficients

of SEX and the various specifications of SEX*CLIENT_IMP are significant in all three

models. These results provide support for Hypothesis 2. The effect of client importance

on female auditors issuing a GCO ranges from 0.38 (Model 1) to 0.52 (Model 3) times

the effect of client importance for male auditors. 15 These results indicate that the effect

of client importance on the likelihood that an auditor issues a GCO is smaller for female

auditors than for male auditors.

In order to test Hypothesis 3, we include our various measures of client risk

(CLIENT_RISK) in Models (5)–(7). The results indicate a positive relationship between

19
each of our measures of client risk and the likelihood that a company receives a GCO.

That is, the odds of receiving a GCO increase as client risk increases, although the

results are somewhat weaker when client risk is measured in terms of INHRISK (Model

(7)). The coefficients of SEX and the various specifications of SEX*CLIENT_RISK are

significant in all three models. These results provide support for Hypothesis 3. The

effect of client risk on female auditors issuing a GCO ranges from 1.4 (Model 3) to 2.7

(Model 2) times the effect of client risk for male auditors.16 These results indicate that

the effect of client risk on the likelihood that an auditor issues a GCO is larger for

female than for male auditors.

[Insert Table 4 around here]

5. Supplementary Analyses

5.1 Heckman Two-Stage Procedure

A potential limitation of our main analyses is that they might suffer from selection bias

because matching between audit engagement partners and clients is possibly not

random. Although our regression models include numerous control variables that relate

to characteristics of the individual audit partner, it is possible that there are other

underlying factors that drive both the likelihood that a company is audited by a female

auditor and the likelihood that a company receives a GCO. That is, it might be that

companies with a higher likelihood of receiving a GCO are audited by female auditors

more often than by male auditors (either because such companies more often select

female auditors or because female auditors are more often assigned to such clients).17

5.1.1 First-Stage Model

20
To control for potential endogeneity, we use the Heckman (1979) two-stage procedure.

In the first stage, we estimate a probit regression with SEX (0 = male; 1 = female) as the

dependent variable:

(2) SEXi = α0 + ß1LNSALESi + ß2AGEi + ß3LEVERAGEi + ß4IROAi +

ß5PROFITABILITYi + ß6TANGIBILITYi + ß7LABORFORCEi +
ß7AUDITFORCEi + i

Our independent variables are based on prior research attempting to predict the presence

of female senior executives and directors (Hillman et al., 2007; Srinidhi et al., 2011;

Wu et al., 2013). LNSALES is included because larger companies face greater pressure

to conform to societal expectations. We therefore expect the coefficient of this variable

to have a positive sign. AGE is included to control for potential inertia. We expect the

coefficient of this variable to have a negative sign. The variables LEVERAGE, IROA,

PROFITABILITY, and TANGIBILITY are included because firm performance is

associated with female participation, possibly because performance precedes diversity.

LEVERAGE and IROA are as previously defined and we expect the coefficients of both

variables to have negative signs, indicating that better performing firms are more likely

to have a female audit engagement partner. PROFITABILITY is EBITDA divided by

total assets. TANGIBILITY is net PPE divided by total assets. We expect positive signs

for the coefficients of both PROFITABILITY and TANGIBILITY. Finally, we include

LABORFORCE and AUDITFORCE. We used Federal Public Service (FPS) Economy

data to identify the percentage of employees who were women in each two-digit SIC

industry category (LABORFORCE). We expect a positive coefficient for this variable

because companies are influenced by their external business environment and

particularly by the need to mirror demographic diversity among their customers (e.g.,

21
Brammer et al., 2007). AUDITFORCE equals the total number of female audit partners

within each audit firm. We expect a positive coefficient for this variable because

companies that select an audit firm with a higher total number of female audit partners

are, ceteris paribus, more likely to have a female audit engagement partner.

Importantly, both LABORFORCE and AUDITFORCE are appropriate instruments: they

can be validly excluded from the second-stage model because there is no theoretical

reason to expect these variables to affect the GCO decision in any way other than

through the audit partner. That is, there are no theoretical reasons to expect that these

variables would be correlated with the structural error term (Lennox et al., 2012).

The results of the first-stage probit regression to predict female engagement partners

are presented in Table 5 (Panel A). Our model does a reasonably good job of explaining

the selection/appointment of female auditors by/to companies. The likelihood ratio test

indicates that our model fits the data well (i.e., the model is significant). The pseudo R2

is 18%. All control variables are significant with the predicted signs except for

TANGIBILITY, which has a negative coefficient, and LEVERAGE, which is not

significant. LABORFORCE and AUDITFORCE are clearly powerful instruments, being

highly significant and large in magnitude in the first-stage estimation. The two-stage

Heckman procedure is therefore not likely to suffer from weak instrument problems.

[Insert Table 5 around here]

5.1.2 Second-Stage Results

From the first-stage probit regression, we obtain the inverse Mills ratio (IMR), λ

(Heckman, 1976, 1979). In the second stage, we include λ in Equation (1) to control for

self-selection bias (i.e., endogeneity of the choice of female auditors and the likelihood

22
of receiving a GCO). Next, we re-estimate Models (1)–(7) from Table 4. The results

from the second stage of the Heckman two-stage procedure are presented in Table 5

(Panel B). For brevity, we present the coefficients only for the test variables. The results

are highly similar to those reported in Table 4.18 After controlling for potential

endogeneity, we find that the coefficients of our various test variables in Models (2)–(7)

remain significant and of similar magnitude, confirming our findings in Table 4.

5.2 Audit Errors

Predicting bankruptcy is not the objective of an audit. Nevertheless, the failure to issue a

GCO prior to bankruptcy is widely viewed as an audit failure. We therefore performed

additional analyses to assess whether a female (male) auditor’s increased (decreased)

reporting conservatism for important (high-risk) clients translates into a decrease

(increase) in audit failures.

To test the (ex post) accuracy of the auditor’s reporting decision, we determined

which companies ceased to exist one year beyond the financial statement date. Similar

to Knechel and Vanstraelen (2007), we then defined ERROR as a categorical variable

that takes a value of 0 if the auditor issued a GCO and the company ceased to exist or if

the auditor did not issue a GCO and the company survived (i.e., no audit error); a value

of 1 if the auditor issued a GCO and the company survived (i.e., a Type I error); and a

value of 2 if the auditor did not issue a GCO and the company ceased to exist (i.e., a

Type II error). Next, we estimated the following multinominal logistic regression:

(3) ERRORi = α0 + ß1LNSALESi + ß2AGEi + ß3PROBANKFi + ß4LOSSi +

ß5BIG4i + ß6SPECFIRMi + ß7SPECAPi + ß8EXPERIENCEi + ß9LANGi +
ß10PORTFOLIO + ß11BUSYi + ß12SEXi + ß13CLIENT_IMPi +

23
 ß14SEX*CLIENT_IMPi + ß15CLIENT_RISKi + ß16SEX*CLIENT_RISKi +
ß17INDUSTRY_DUMMIESi + i

All variables are as previously defined. The results (not tabulated) provide some

evidence that female auditors have lower Type I error rates. The magnitude of the

effects is, however, notably lower compared to the results in Table 4. This is probably

related to the fact that client bankruptcy is an infrequent event. The number of Type I

audit errors (1,540) is also relatively low (compared to the total number of audit

opinions that are being issued; 21.7%). Only 69 companies in our sample (0.97%)

ceased to exist one year beyond the financial statement date. The vast majority (77.7%)

of the 7,105 audit opinions that were issued during our sample period did not constitute

an audit error. The number of Type II errors was very low for our sample, with only 46

companies not receiving a GCO and subsequently failing. Given that the number of

companies with a female auditor is also much lower than the number of companies with

a male auditor, effect sizes would have to be extremely large to be statistically

significant in a relatively small sample such as ours. Unsurprisingly, the Type II error

coefficients of the test variables are therefore not significant in the multinominal logistic

regressions. However, in all models, the coefficient signs of all the test variables are

consistent with female auditors having a higher likelihood of issuing GCOs to

companies that subsequently cease to exist (i.e., less Type II errors).

Following prior research (e.g., Carey et al., 2012; Knechel and Vanstraelen, 2007),

we further test the accuracy of female and male auditors’ reporting decisions by

estimating the impact of GCOs on the likelihood of subsequent bankruptcy:

(4) BANKRUPTCYi = α0 + ß1LNSALESi + ß2AGEi + ß3PROBANKFi + ß4LOSSi +

ß5BIG4i + ß6SPECFIRMi + ß7SPECAPi + ß8EXPERIENCEi + ß9LANGi +
ß10PORTFOLIO + ß11BUSYi + ß12SEXi + ß13CLIENT_IMPi +

24
 ß14SEX*CLIENT_IMPi + ß15CLIENT_RISKi + ß16SEX*CLIENT_RISKi +
ß17GCOi + ß18SEX*GCOi + ß19SEX*GCO*CLIENT_IMPi +
ß20SEX*GCO*CLIENT_RISKi + ß21INDi + i

BANKRUPTCY is a dummy variable that takes a value of 1 for companies that ceased to

exist one year after the financial statement date. All other variables are as previously

defined. We include interactions between our test variables and GCO in order to test if

the accuracy of the auditors’ reporting decision varies with auditor sex. The results from

these analyses (not tabulated) provide no evidence that the accuracy of the audit opinion

is higher when a company has a female audit engagement partner. Although the

coefficient signs of the test variables in almost every possible specification of Equation

(4) show a positive relationship between reporting accuracy and the presence of a

female auditor, the magnitude of the effects is always very small and the coefficients

never reach statistical significance. Again, the power of these analyses is rather poor

due to the fact that bankruptcy is an infrequent event.

5.3 Alternative Measures of CLIENT_IMP and CLIENT_RISK

In our main analyses, we measured client importance at the individual level. As a

sensitivity test, we also measured client importance at the firm level. Client importance

at the firm level was measured analogously to client importance at the partner level; that

is, as (1) the ratio of total client fees (audit and non-audit) to the audit firm’s total

revenue from all clients, (2) the ratio of a client’s audit fee to the audit firm’s total

revenue from all clients, and (3) the ratio of a client’s non-audit fees to the audit firm’s

total revenue from all clients. For brevity, we do not discuss these alternative

specifications at length because the results relating to our test variables remained

qualitatively and quantitatively unchanged.19

25
 To further test the robustness of our results, we also used various other

specifications for CLIENT_RISK to measure the riskiness of a particular client. First, we

tested PROBANKF, PROFITABILITY, and TANGIBILITY and their interactions with

SEX (variables are as previously defined). Second, we tested the following alternative

specifications of CLIENT_RISK: (1) inventory divided by total assets, (2) receivables

divided by total assets, (3) total liabilities divided by total assets, and (4) current assets

divided by current liabilities. The results of these different specifications (not tabulated)

were essentially the same as those reported in Tables 4 and 5.

Finally, we reran all our tests analyzing the relationship of SEX with CLIENT_IMP

and CLIENT_RISK simultaneously instead of separately. That is, we included

CLIENT_IMP and CLIENT_RISK (in their various specifications) at the same time in

Equation (1), testing the relationship between SEX and GCO. The results (not tabulated)

confirm our prior analyses that female auditors are, ceteris paribus, more likely to issue

GCOs to important and high-risk clients than male auditors. It is noteworthy that we

also tested whether there is a three-way interaction between SEX, CLIENT_IMP and

CLIENT_RISK. This does not appear to be the case, indicating that there is no additional

effect on the likelihood that a female auditor issues a GCO when a client is both an

important and high-risk client.

Taken together, our analyses with different specifications for CLIENT_IMP and

CLIENT_RISK indicate that potential measurement errors are unlikely to drive the

significant effects of our test variables on the propensity of GCOs.

5.4 Additional Sensitivity Analyses

26
We performed several additional tests to assess the sensitivity of our results. First, we

estimated our tests separately for non-Big 4 (n = 3,733) and Big 4 samples (n = 3,372).

It is conceivable that the independence threat could vary between these two groups of

audit firms. Furthermore, auditor quality and the likelihood of receiving a GCO may be

endogenously determined (i.e., healthier companies are more likely to hire Big 4

auditors as well as less likely to receive a GCO). Second, as previously discussed, for

many companies in our sample, the demand for auditing is not voluntary. Auditors may

face different incentives when deciding upon the audit opinion to be issued to a client

for which a statutory audit was required or to a client who voluntarily appointed an

auditor (i.e., the independence threat could vary between these two groups of clients). 20

We re-estimated our models with an additional dummy variable to indicate whether the

company was legally required to appoint an auditor. Alternatively, we estimated our

tests separately for mandatorily (n = 4,784) and voluntarily audited companies (n =

2,321).21 Finally, we controlled for the fact that auditors might be more reluctant to

issue GCOs during the last year of their contract; auditors in Belgium are appointed for

periods of three years. Previous research indicates that, compared to receiving a GCO

during the first or second year of the contract, receiving one during the third year

substantially increases the likelihood (by about four times) that a company will switch

auditors at the next opportunity (Knechel and Vanstraelen, 2007; Vanstraelen, 2003).

The results of these additional sensitivity tests were essentially identical to the

results in Tables 4 and 5. In sum, the consistent results of these additional tests indicate

that our finding that, ceteris paribus, female auditors are more likely to issue GCOs to

financially distressed companies is robust across various models, variable

specifications, and analysis techniques.

27
6. Conclusion, Discussion, and Limitations

In this paper, we examined the relationship between the likelihood that a GCO is

issued and the presence of a female or male auditor. Using a sample of 7,105 financially

distressed, private Belgian companies, our results suggest that audit quality is higher for

female audit engagement partners. Female auditors are, ceteris paribus, more likely than

male auditors to issue GCOs. Moreover, this effect is stronger when the client is an

important or high-risk client. Our results therefore suggest that female auditors deliver

higher audit quality because they are more independent (making them issue more GCOs

to important clients) and more risk-averse (making them issue more GCOs to high-risk

clients). Furthermore, the multinominal logistic regression results showed that female

auditors have lower rates of audit errors, indicating higher reporting accuracy.

The results of this paper should be interpreted with some caution due to possible

limitations. First, with respect to the generalizability of the results, the companies in the

sample are not publicly listed and are generally smaller than those used in most prior

(US) research. Regulations and accounting rules in Belgium also differ from those in the

Anglo-Saxon countries that have been the traditional subjects of audit quality research.

Auditor incentives in Belgium tend to favor the avoidance of disputes with a client so as

to prevent the loss of that client. In environments where incentives for auditor

independence (i.e., litigation risk and reputation risk) are high, auditors (both female

and male) will presumably be more independent than in our sample. As a result, the

differences between female and male auditors observed in this study might be smaller or

even eliminated altogether in such an environment (because auditor independence

impairment is arguably only a marginal phenomenon in such an environment). Second,

although our results are robust across various models, variable specifications, and

28
analysis techniques, we cannot completely rule out the possibility that our results are

driven by omitted variables or potential underlying endogeneity. We were, for example,

unable to control for prior year GCO because our data come from a single year. Results

from prior research (e.g., Carcello and Neal, 2000), however, occasionally indicate that

a GCO is “sticky” (i.e., correlated with a prior year GCO).

Notwithstanding these limitations, our results provide strong evidence for higher

audit quality by female auditors. Future research could use other indicators of audit

quality or data from other institutional settings or time periods to establish the

robustness, validity, and generalizability of our results. It would also be interesting for

future research to investigate if there are other situations in which female auditors are

more likely to issue GCOs (or conversely, in which male auditors are more likely to do

so). Finally, future research could also investigate if the higher audit quality provided by

female auditors is also being priced in the market for audit services.

Notes

1
Arguably, the propensity to issue GCOs is a more direct test of auditor independence than measures of
earnings management (DeFond et al., 2002; Hope and Langli, 2010) because (1) audit opinions are
directly and unambiguously measurable and (2) the auditor is solely responsible for the audit opinion.
Therefore, in this paper, we use the propensity to issue GCOs, rather than the extent of earnings
management as an indicator of auditor independence impairment (and thus audit quality).
2
Audit firms have contracting and monitoring mechanisms in place to mitigate the moral hazard inherent
to their decentralized organizational structures (e.g., firm-wide profit-sharing rules that lower incentives
for individual partners to take on risky clients; Burrows and Black, 1998; Bedard et al., 2008).
3
The tone at the top is ‘the ethical environment within the firm created through management practices
and espoused values’ (Douglas et al., 2001: 107). Together with an audit firm’s culture, the tone at the top
establishes whether the firm is quality-orientated (i.e., the audit is a high quality service) or revenue-
orientated (i.e., the audit is a mere commodity) (Jenkins et al., 2008).

29
4
Note that we do not argue that such a relationship might exist because female and male auditors are
inherently different (as a consequence of inherent differences between men and women; see Hardies and
Khalifa (2014) for a detailed critique of such arguments).
5
Belgian Company Law (Article 96) requires management to justify in the annual report the application
of valuation rules in the assumption of continuity if the balance sheet shows an accumulated loss or if the
profit and loss account shows a bottom-line loss in two successive years.
6
Companies are considered to be large if they meet at least two of the following criteria: (1) turnover
(excluding VAT) >7,300,000 euros; (2) total assets >3,650,000 euros; and (3) number of employees
(yearly average) >50. These criteria must be considered on a consolidated basis if the company belongs to
a group that publishes consolidated statements or if the company is a holding or a public company. Public
companies and companies with more than 100 employees are always considered to be large.
7
Rather than using our sample of 7,105 financially distressed companies, we used the full sample of
17,066 companies to calculate the various specifications of CLIENT_IMP. The variables SPECFIRM,
SPECAP, PORTFOLIO, and BUSY were also calculated based upon the full sample of 17,066 companies.
8
We measure client importance at the individual partner level, rather than at the firm level, because client
importance measured at the individual partner level seems to be more powerful in capturing audit
reporting decisions (Chen et al., 2010). In supplementary analyses, we also discuss the results of client
importance variables measured at the audit firm level.
9
It is worth noting that the interpretation of coefficients of interaction variables is not as straightforward
in logistic models as it is in linear models because logistic regressions calculate changes in the odds ratio
of the dependent variable, not changes in the dependent variable itself. An interpretation that is useful in
this study is that an interaction between SEX and another variable Y tells us by how much the effect of Y
differs between female and male auditors in multiplicative terms (Buis, 2010). Because negative
coefficients (β) lead to odds ratios (eβ) less than one, negative coefficients for SEX*CLIENT_IMP would
indicate that for female auditors the effect of CLIENT_IMP on the odds that a client receives a GCO is
less than one time the effect of CLIENT_IMP on the odds that a client receives a GCO for male auditors.
10
Positive coefficients lead to odds ratios greater than one, so positive coefficients for
SEX*CLIENT_RISK would indicate that for female auditors the effect of CLIENT_RISK on the odds that
a client receives a GCO is more than one time the effect of CLIENT_RISK on the odds that a client
receives a GCO for male auditors.
11
In this model (the “FITO-metric”), eight variables are first logit-transformed and then equally
weighted: (1) Gross added value / personnel employed, (2) Net return on total assets before taxes, (3) Net
return on equity after taxes, (4) Self-financing level, (5) General level of financial independence, (6)
Short-term financial debt level, (7) Free cash flow, and (8) (Cash + short-term investments – short-term
financial debt) / current assets (Ooghe and Spaenjers 2005). A higher score indicates a healthier company.
12
Our results are unchanged if we use alternative definitions of EXPERIENCE such as the natural
logarithm of the number of years the company’s auditor has been legally authorized to sign audit opinions
or dummy variables based on, for example, 5 or 10 year cutoff points.

30
13
Belgium is divided into two large regions, the Dutch-speaking region of Flanders in the north and the
French-speaking southern region of Wallonia. Registered auditors have to indicate their linguistic
affiliation.
14
Before computing the VIF in an OLS regression, we first ruled out nonlinearity using Box-Tidwell
Transformation.
15
As explained in footnote 9, the interaction variable SEX*CLIENT_IMP can be interpreted as the extent
to which the effect of CLIENT_IMP differs between female and male auditors in multiplicative terms. For
example, the effect of CLIENT_FEES on female auditors issuing a GCO is only 0.38 times (= e–.982) the
effect of CLIENT_FEES for male auditors. For male auditors each unit increase in CLIENT_FEES
decreases the odds that a GCO is issued by 0.40 (= e–.909). For female auditors each unit increase in
CLIENT_FEES only decreases the odds that a GCO is issued by 0.15 (= 0.40 * 0.38).
16
These results are obtained in the same way as those for CLIENT_IMP (see footnote 15). For example,
the effect of LEVERAGE is 1.6 times (= e.491) larger for female than for male auditors. For male auditors
each unit increase in LEVERAGE increases the odds that a GCO is issued by 2.7 (= e1.006). For female
auditors each unit increase in LEVERAGE increases the odds that a GCO is issued by 4.5 (= 1.6 * 2.7).
17
We wish to thank an anonymous reviewer for bringing this to our attention.
18
The results of the (unreported) control variables are almost identical to those reported in Table 4.
19
In addition, we also used client importance measures for which the denominator was not based on the
auditor’s total revenue from all clients. Specifically, we performed additional sensitivity tests in which
client importance was measured as (1) the ratio of a client’s audit fee to the auditor’s revenue from audit
services from all clients and (2) the ratio of a client’s non-audit fees to the auditor’s revenue from non-
audit services from all clients. We performed these sensitivity tests both at the individual partner level and
the firm level. The results (not tabulated) were qualitatively and quantitatively similar to those reported.
20
We wish to thank an anonymous reviewer for bringing this to our attention.
21
By excluding certain companies from our sample (e.g., public companies, financial institutions), our
sample contains somewhat more voluntarily audited companies (32.7%) than the population as a whole;
Sarens et al. (2012) report that 4.561 Belgian companies (25%) voluntarily appointed an auditor in 2009.

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36
 Table 1
Derivation of Sample
Sample Size
Description for Audit Opinion Analyses
Company Observations in 2008 17,066
Less Public Companies a (132)
Less Non-Stressed Companies (7926)
Less Observations with More Than One (238)
Auditor (Joint-Audits)
Less Financial Institutions b (844)
Less Public Administrative Institutions c (4)
Less Observations with Missing Data for (817)
Audit Opinion ————
7,105
a
Public companies are excluded because auditors face different incentives when deciding upon the audit opinion
to be issued to a public vis-à-vis private company.
b
Financial institutions are excluded because of their specific accounting requirements, which differ substantially
from those of industrial and commercial companies.
c
Public administrative institutions are excluded because of their specific nature.

37
 Table 2
Descriptive Statistics for Variables in GCO Models (N = 7,105)

Panel A: Descriptive Statistics for the Full Sample, Female Auditors, and Male Auditors

Variable Full Sample (N = 7,105) (1) Female Auditors (n = 640) (2) Male Auditors (n = 6465) T Test
Mean Std. Dev. Median Mean Std. Dev. Median Mean Std. Dev. Median (1) – (2)
GCO 0.22 0.414 0 0.22 0.414 0 0.22 0.414 0 –0.002
LNSALES 13.35 5.68 15.35 13.53 5.40 15.35 13.34 5.71 15.35 0.194
AGE 20.27 16.99 17 20.53 15.45 18 20.24 17.13 17 0.291
PROBANKF 0.527 0.073 0.539 0.530 0.076 0.539 0.527 0.073 0.539 0.003
LOSS 0.54 0.499 1 0.54 0.499 1 0.54 0.499 1 0.004
BIG4 0.47 0.499 0 0.44 0.497 0 0.48 0.500 0 –0.040**
SPECFIRM 0.16 0.362 0 0.14 0.350 0 0.16 0.364 0 –0.018
SPECAP 0.06 0.232 0 0.03 0.161 0 0.06 0.238 0 –0.032***
EXPERIENCE 16.5 6.92 16 13.5 5.48 14 16.8 6.98 17 –3.297***
LANG 0.28 0.450 0 0.36 0.481 0 0.27 0.446 0 0.088***
PORTFOLIO 21.33 1.81 21.53 20.80 1.57 20.75 21.39 1.83 21.55 –0.594***
BUSY 0.59 0.49 1 0.48 0.50 0 0.61 0.49 1 –0.130***
CLIENT_FEES 0.0365 0.0840 0.0113 0.0427 0.0729 0.0170 0.0359 0.0850 0.0109 0.007**
CLIENT_AF 0.0309 0.0742 0.0097 0.0382 0.0648 0.0150 0.0303 0.0750 0.0093 0.008**
CLIENT_NAS 0.0049 0.0000 0.0000 0.0041 0.0211 0.0000 0.0050 0.0285 0.0000 –0.001
LEVERAGE 0.838 0.795 0.770 0.864 0.861 0.775 0.835 0.789 0.770 0.029
IROA 0.0160 0.2161 –0.0026 0.0116 0.2161 –0.0027 0.0165 0.2132 –0.0026 –0.005
INHRISK 0.1053 0.1824 0.0027 0.0992 0.1676 0.0003 0.1053 0.1824 0.0029 –0.006

Panel B: Mean Differences for Companies with and without a GCO for the Full Sample, Female Auditors, and Male Auditors

Variable Full Sample (N = 7,105) Female Auditors (n = 640) Male Auditors (n = 6465)
No GCO GCO T Test No GCO GCO T Test No GCO GCO T Test
(n = 5,542) (n = 1,563) (n = 500) (n = 140) (n = 5,042) (n = 1,423)
LNSALES 13.68 12.17 1.52*** 13.85 12.37 1.49** 13.67 12.15 1.52***
AGE 21.25 16.78 4.469*** 21.70 16.34 5.36*** 21.20 16.82 4.38***
PROBANKF 0.544 0.467 0.076*** 0.545 0.476 0.069*** 0.544 0.476 0.077***

38
LOSS 0.45 0.86 –0.411*** 0.45 0.86 –0.403*** 0.45 0.86 –0.412***
BIG4 0.44 0.59 –0.149*** 0.42 0.52 –0.105** 0.44 0.60 –0.154***
SPECFIRM 0.15 0.18 –0.029** 0.14 0.16 –0.019 0.15 0.18 –0.030**
SPECAP 0.05 0.09 –0.040*** 0.03 0.02 0.01 0.05 0.09 –0.045***
EXPERIENCE 16.8 15.5 1.3*** 13.6 13.1 0.5 17.1 15.7 1.4***
LANG 0.29 0.26 0.033** 0.36 0.37 –0.011 0.28 0.24 0.037**
PORTFOLIO 21.24 21.65 –0.41*** 20.77 20.89 –0.12 21.29 21.73 –0.44***
BUSY 0.57 0.68 –0.11*** 0.46 0.54 –0.09* 0.58 0.46 –0.11***
CLIENT_FEES 0.0389 0.0292 0.0098*** 0.0435 0.0403 0.0032 0.0385 0.0281 0.0104***
CLIENT_AF 0.0333 0.0241 0.0092*** 0.0387 0.0369 0.0018 0.0323 0.0227 0.0010***
CLIENT_NAS 0.0049 0.0051 –0.0003 0.0043 0.0034 0.0009 0.0049 0.0053 –0.0004
LEVERAGE 0.704 1.314 –0.611*** 0.763 1.228 –0.465*** 0.698 1.323 –0.625***
IROA –0.0181 0.1373 –0.1554*** –0.0199 0.1243 –0.1442*** –0.0180 0.1385 –0.1565***
INHRISK 0.1021 0.1144 –0.01236** 0.0946 0.1158 –0.0212 0.1028 0.1143 –0.0115**
*, **, ***
p < .10, .05, .01, respectively.
Variables are defined in the appendix.

39
 Table 3
Pearson Correlation Matrix

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) VIF
GCO (1) 1
LNSALES (2) –.111 1 1.210
(.000)
AGE (3) –.109 .147 1 1.040
(.000) (.000)
PROBANKF –.431 .370 .122 1 1.612
(4) (.000) (.000) (.000)
LOSS (5) .342 –.088 –.056 –.505 1 1.391
(.000) (.000) (.000) (.000)
BIG4 (6) .124 –.096 –.036 –.109 .028 1 2.418
(.000) (.000) (.002) (.000) (.019)
SPECFIRM (7) .034 –.030 –.001 –.054 .025 .428 1 1.247
(.005) (.013) (.914) (.000) (.037) (.000)
SPECAP (8) .074 –.040 –.009 –.062 .052 .224 .194 1 1.125
(.000) (.001) (.470) (.000) (.000) (.000) (.000)
EXPERIENCE –.080 .050 .075 .065 –.016 –.308 –.068 –.037 1 1.193
(9) (.000) (.000) (.000) (.000) (.190) (.000) (.000) (.002)
LANG (10) –.031 –.004 .020 .011 –.015 –.080 –.136 –.042 .033 1 1.076
(.010) (.753) (.100) (.338) (.193) (.000) (.000) (.001) (.006)
PORTFOLIO .100 –.106 –.015 –.076 .025 .674 .270 .220 –.085 –.055 1 2.217
(11) (.000) (.000) (.227) (.000) (.047) (.000) (.000) (.000) (.000) (.000)
BUSY (12) .091 –.095 –.039 –.061 .037 .485 .165 .159 –.176 –.069 .634 1 1.664
(.000) (.000) (.002) (.000) (.000) (.000) (.000) (.000) (.000) (.000) (.000)
SEX (13) –.001 .010 .005 .010 .004 –.022 –.011 –.041 .057 –.136 –.114 –.070 1 1.038
(.937) (.417) (.681) (.376) (.766) (.059) (.342) (.001) (.000) (.000) (.000) (.000)
CLIENT_FEES –.050 .172 .103 .064 –.030 –.205 –.061 –.069 .073 .031 –.336 –.273 .023 1 1.178
(14) (.000) (.000) (.000) (.000) (.017) (.000) (.000) (.000) (.000) (.013) (.000) (.000) (.068)
CLIENT_AF –.054 .163 .095 .071 –.031 –.227 –.076 –.074 .085 .033 –.339 –.286 .031 .937 1 1.181
(15) (.000) (.000) (.000) (.000) (.014) (.000) (.000) (.000) (.000) (.008) (.000) (.000) (.015) (.000)
CLIENT_NAS .004 .073 .046 .004 –.007 –.001 .023 –.009 –.006 –.001 –.091 –.045 –.009 .490 .157 1 1.022
(16) (.736) (.000) (.000) (.730) (.551) (.962) (.055) (.441) (.641) (.927) (.000) (.000) (.453) (.000) (.000)
LEVERAGE .318 –.100 –.083 –.499 .149 .062 –.007 .024 .014 –.068 .036 .024 –.010 –.041 –.034 –.029 1 1.388
(17) (.000) (.000) (.000) (.000) (.000) (.000) (.557) (.045) (.239) (.000) (.002) (.040) (.379) (.001) (.007) (.013)
IROA (18) .298 –.178 –.061 –.636 .488 –.061 .038 –.030 –.022 –.035 .028 .024 –.006 –.040 –.044 –.003 .306 1 1.806
(.000) (.000) (.000) (.000) (.000) (.000) (.002) (.015) (.064) (.003) (.019) (.039) (.588) (.001) (.000) (.826) (.000)

40
INHRISK (19) .028 .108 –.011 –.101 .161 –.087 –.036 –.011 –.013 .042 –.005 –.045 –.010 .060 .070 –.010 –.025 .026 1 1.060
(.017) (.000) (.368) (.000) (.000) (.000) (.003) (.368) (.282) (.000) (.681) (.000) (.420) (.000) (.000) (.423) (.033) (.026)
Variables are defined in the appendix.

41
 Table 4
Logistic Regression Analyses for the Impact of the Audit Engagements Partner’s Sex on the Audit Opinion
(Dependent Variable = GCO) (N = 7,105)

Model (1) Model (2) Model (3) Model (4) Model (5) Model (6) Model (7)
Variables Expected sign  (SE )  (SE )  (SE )  (SE )  (SE )  (SE )  (SE )
CONSTANT –4.409*** –5.250*** –5.250*** –4.404*** –4.462*** –4.402*** –4.458***
(.329) (.352) (.351) (.329) (.333) (.329) (.331)
LNSALES – –.051*** –.050*** –.050*** –.051*** –.041*** –.054*** –.054***
(.007) (.007) (.010) (.007) (.010) (.009) (.009)
AGE – –.010*** –.011*** –.011*** –.010*** –.010*** –.010*** –.010***
(.002) (.002) (.002) (.002) (.002) (.002) (.002)
PROBANKF – –13.431*** –14.684*** –14.678*** –13.421*** –13.541*** –13.410*** –13.483***
(.630) (.673) (.673) (.630) (.636) (.630) (.631)
LOSS + 1.193*** 1.184*** 1.184*** 1.193*** 1.184*** 1.192*** 1.203***
(.088) (.089) (.089) (.088) (.088) (.088) (.089)
BIG4 + .365*** .211** .210*** .363*** .369*** .363*** .361***
(.106) (.111) (.111) (.106) (.106) (.106) (.107)
SPECFIRM + –.271*** –.331*** –.331*** –.271*** –.268*** –.267*** –.267***
(.103) (.105) (.105) (.103) (.103) (.103) (.103)
SPECAP + .314** .289** .289** .312** .310** .313** .307**
(.146) (.142) (.142) (.146) (.146) (.146) (.146)
EXPERIENCE – –.012** –.013** –.013** –.012** –.013** –.012** –.012**
(.006) (.006) (.006) (.006) (.006) (.006) (.006)
LANG – –.082 –.134* –.135* –.102 –.082 –.080 –.082
(.084) (.076) (.076) (.082) (.082) (.082) (.082)
PORTFOLIO + .289*** .295*** .297*** .296*** .300** .280** .300***
(.101) (.108) (.108) (.106) (.132) (.110) (.106)
BUSY – –.779*** –.811*** –.871*** –.776*** –.824*** –.768*** –.818***
(.170) (.178) (.178) (.170) (.173) (.170) (.173)
SEX + .206** .284*** .290*** .201** .410*** .223** .189**
(.101) (.106) (.102) (.100) (.107) (.108) (.094)

42
CLIENT_FEES – –.909***
(.217)
CLIENT_AF – –.858***
(.214)
CLIENT_NAS – –.622**
(.278)
SEX*CLIENT_FEES – –.982***
(.237)
SEX*CLIENT_AF – –.836***
(.200)
SEX*CLIENT_NAS – –.650**
(.264)
LEVERAGE + 1.006***
(.155)
IROA + 3.343***
(.204)
INHRISK + .404***
(.126)
SEX*LEVERAGE + .491***
(.119)
SEX*IROA + .975***
(.335)
SEX*INHRISK + .337**
(.156)

Model tests
LR statistic 1822.975 1871.444 1871.822 1833.362 1932.710 1840.431 1831.095
(p = .000) (p = .000) (p = .000) (p = .000) (p = .000) (p = .000) (p = .000)
Pseudo R2 .360 .383 .383 .360 .378 .362 .360
*, **, ***
p < .10, .05, .01, respectively. All reported p-values are two-tailed.
Two-digit industry indicator variables are included in all models but not tabulated.
Variables are defined in the appendix.

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 Table 5
Heckman Two-Stage Estimation Results for the Impact of the Audit Engagements Partner’s Sex on the Audit Opinion

Panel A: Companies Selection of Female Audit Engagement Partners

(Dependent variable = SEX) (N = 7,105)

Variables Expected sign  (SE )

CONSTANT 1.547*** (.097)
LNSALES + .004*** (.001)
AGE – –.003*** (.001)
LEVERAGE – .013 (.028)
IROA – –.063* (.033)
PROFITABILITY + .006*** (.002)
TANGIBILITY + –.208*** (.064)
LABORFORCE + .546*** (.103)
AUDITFORCE + 1.203*** (.264)

Model tests
LR statistic 3039.775 (p = .000)
Pseudo R2 .18

Panel B: Second-Stage Logistic Regression Models for the Impact of the Audit Engagements Partner’s Sex on the Audit Opinion
(Dependent Variable = GCO) (N = 7,105)

Model (1) Model (2) Model (3) Model (4) Model (5) Model (6) Model (7)
Variables Expected  (SE )  (SE )  (SE )  (SE )  (SE )  (SE )  (SE )
sign
SEX + .206** .276*** .289*** .203** .410*** .222** .190**
(.102) (.106) (.100) (.099) (.105) (.111) (.091)

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CLIENT_FEES – –.906***
(.218)
CLIENT_AF – –.852***
(.214)
CLIENT_NAS – –.618**
(.270)
SEX*CLIENT_FEES – –.972***
(.236)
SEX*CLIENT_AF – –.835***
(.201)
SEX*CLIENT_NAS – –.641**
(.254)
LEVERAGE + 1.011***
(.153)
IROA + 3.121***
(.200)
INHRISK + .399***
(.122)
SEX*LEVERAGE + .494***
(.117)
SEX*IROA + .962***
(.331)
SEX*INHRISK + .335**
(.167)
λ +/– .004*** .004*** .004*** .004*** .004*** .004*** .004***
(.001) (.001) (.001) (.001) (.001) (.001) (.001)
Model tests
LR statistic 1837.075 1876.201 1869.361 1845.095 1934.408 1849.168 1837.307
(p = .000) (p = .000) (p = .000) (p = .000) (p = .000) (p = .000) (p = .000)
Pseudo R2 .361 .383 .383 .362 .378 .362 .361

45
*, **, ***
p < .10, .05, .01, respectively. All reported p-values are two-tailed.
Two-digit industry indicator variables are included in all models but not tabulated.
λ = Inverse Mills ratio computed from the first stage probit regression.
All other variables are defined in the appendix.

46
 APPENDIX
Variable Definitions
Dependent variable

GCO dummy variable: GCO = 1, in case of going-concern opinion

Independent variables
LNSALES natural logarithm of total sales
AGE age of the company measured in years
PROBANKF score of a standardized bankruptcy prediction model developed for
Belgian companies
LOSS dummy variable: LOSS = 1, in case the company experienced losses
BIG4 dummy variable: BIG4 = 1, in case of a Big 4 auditor
SPECFIRM dummy variable: SPECFIRM = 1, in case the audit firm is an
industry specialist
SPECAP dummy variable: SPECAP = 1, in case the audit engagement partner
is an industry specialist
EXPERIENCE experience of the auditor measured in years
LANG dummy variable: LANG = 1, in case the auditor has indicated a
French-speaking affiliation
PORTFOLIO natural logarithm of audit partner’s total audited total assets
BUSY dummy variable: BUSY = 1, in case the auditor ranks among the top
20% of partners based on the number of assignments
SEX dummy variable: SEX = 1, in case of a female auditor
CLIENT_FEES ratio of total client fees (audit and non-audit) to the individual
auditor’s total revenue from all clients
CLIENT_AF ratio of a client’s audit fee to the individual auditor’s total revenue
from all clients
CLIENT_NAS ratio of a clients’ non-audit fees to the individual auditor’s total
revenue from all clients
LEVERAGE total liabilities divided by total assets
IROA inverse of ROA (ROA = net income divided by total assets)
INHRISK inventory and receivables divided by total assets
PROFITABILITY EBITDA divided by total assets
TANGIBILITY net PPE divided by total assets
LABORFORCE percentage of employees who were women in each two-digit SIC
industry category
AUDITFORCE total number of female audit partners within each audit firm

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