External audit and bankruptcy prediction

In this paper, we investigate the relationship between external auditor characteristics and the likelihood of bankruptcy. We use a sample of US public com- panies to analyse whether auditor attributes are associated with default. We also test whether the inclusion of such attributes in bankruptcy prediction models improves their predictive ability. We nd that rms audited by industry-expert auditors, large audit rms and long-tenured auditors are less likely to default. Firms with higher audit fees are more likely to default. Our results also show that the inclusion of audi- tor attributes signi cantly increases the predictive ability of bankruptcy prediction models. This paper contributes to the literature about auditing and bankruptcy pre- diction. Our results suggest that the auditor attributes can provide predictive signals concerning a default risk and that an external audit can play a relevant role in early warnings of nancial distress. Our study also suggests that bankruptcy prediction models can become more e ective if they are complemented with audit data. Our results are of interest to market participants, auditors, regulating authorities, banks and other nancial institutions that are interested in credit risk assessment.