Corporate Violations and Audit Opinions: Warning Effect or Uncovering Effect?

This paper investigates the impact of corporate violations on audit opinions in China. Using the sample of Chinese listed A-share companies over the period 2004–2020, we find that corporate violations increase the likelihood of modified audit opinions (MAOs). Corporate violations increase MAOs likelihood by increasing agency costs, weakening internal control, improving earnings management, and reducing corporate profitability. The effect is more significant for firms with a lower proportion of female executives, higher risk preference of executives, and lower quality of information disclosure. These results have important policy and managerial implications, illustrating how agency conflicts stemming from corporate violations can influence audit opinions.