Business Strategy and Auditor Reporting

SUMMARY This study examines whether a firm's business strategy influences auditor reporting. We rely on the organizational literature to develop our prediction that firms utilizing the innovative “prospector” strategy will be more likely than firms utilizing the cost-leadership “defender” strategy to receive both going concern and material weakness opinions. Our empirical evidence supports this prediction. Specifically, we find that, among a sample of financially troubled firms, prospectors are significantly more likely than defenders to receive a going concern opinion. We then analyze a sample of clients who subsequently filed for bankruptcy and find that auditors are less likely to issue going concern opinions to prospector clients. This indicates that auditors commit more Type II errors when auditing prospector clients. We also find that prospectors are significantly more likely than defenders to receive a material weakness opinion. Taken together, the evidence suggests that business strategy is a significant determinant of both going concern and material weakness auditor reporting. JEL Classifications: M41; M42; L10. Data Availability: All data are available from public sources identified in the text.