Audit adjustments and corporate financing: evidence from Iran

Abstract

PurposeIndependent auditors play an important role in increasing the reliability of financial information by giving their professional opinion on the financial statements of business units. Therefore, the purpose of this study is to investigate the relationship between the audit adjustments and financing of companies.Design/methodology/approachThe sample of the study includes 173 Iranian companies listed on the Tehran Stock Exchange (TSE) between 2010 and 2017.FindingsThere is no significant association between the profit incremental audit adjustments (Disagreement) and financing of companies in the current year and the following year through a loan. Furthermore, there is no meaningful relationship between the earnings downward/upward audit adjustments (Disagreement) and the financing of companies in the current year and the following year through ordinary stocks. However, there is a meaningful relationship between the profit downward audit adjustments (Disagreement) and the financing of firms in the current year through a loan. In general, as Iran's economy is facing severe economic sanctions, the existence of a high inflation rate has led to a steady increase in the stock prices of Iranian companies; hence, investors regardless of audit reports prefer to invest their money in the stock market so that it does not lose its purchasing power. Under these disaster economic circumstances, creditors are less willing to lend to companies with lower profits.Originality/valueThe results of the current study extend the knowledge of previous studies as financial pressures from economic sanctions have both positive and negative psychological effects on corporate financing.