Organizational capital and audit outcomes

We investigate whether firms’ organizational capital affects audit outcomes. Using a large sample of U.S. 30,769 firm-year observations during the period 2000–2018, we find a negative association between organizational capital and audit fees, audit delays, going concern opinion, internal control weaknesses, and financial restatement. Our findings hold up to a battery of robustness checks and endogeneity tests. In cross-sectional analyses, we report that the negative effect of organizational capital on audit outcomes is more pronounced for firms located far away from their auditors, audited by non-specialist auditors, characterized by high information asymmetry and poor corporate governance. We further show that organizational capital reduces the probability of a lawsuit. Overall, our findings indicate that client firms’ organizational capital matters for audit outcomes. JEL classification: M41, M42