Board Structure and Modified Audit Opinions: Evidence from the Portuguese Stock Exchange

Abstract

Prior research has found evidence that some characteristics of the board of directors influence the quality of financial reporting. In this study we extend the literature by analysing a different dimension of financial reporting quality, the probability of a firm receiving a modified audit opinion. To this end, we considered a sample of companies listed on Euronext Lisbon where, unlike the current situation in other markets such as the US, firms can publish financial statements not in accordance with GAAP. Using 171 firm‐year observations for the period 2002–05, the evidence we report is consistent with the hypotheses that firms with more diligent and independent boards are less likely to receive a modified audit opinion. Results are robust to different specifications and also show that the existence of dividend payments, financial health, performance and growth opportunities are additional factors associated with the likelihood of a modified audit opinion. Our analysis also shows that the transition in 2005 to a reporting framework based on international accounting standards is strongly related with better financial reporting quality.