Societal Trust and Modified Audit Opinions: International Evidence

ABSTRACT This study examines how societal trust influences auditors’ likelihood of issuing modified audit opinions. Analyzing cross-country data, we find that auditors in countries with high levels of societal trust are less prone to issue modified audit opinions. Specifically, our findings indicate that this effect is moderated by formal audit-related institutions, such as heightened auditor liabilities, the presence of Public Company Accounting Oversight Board (PCAOB) inspections, and a more advanced audit profession. These results are consistent even when applying a difference-in-differences (DiD) approach. Further analysis shows that the moderating impact of formal institutions is more pronounced for clients operating domestically, clients of non-Big N auditors, and auditors with long tenure. Overall, our findings highlight societal trust as a significant informal institution influencing auditor opinions, with a complex interplay between this trust and formal audit-related institutions. The study offers important implications for policy, practice, and future research. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M40; M41.