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The purpose of this paper is to examine the association between audit opinion and earnings persistence of listed companies in Thailand from 2004 to 2008.

We use archival data and hand collected data in regression analysis. Content analysis was used to perform decomposition analysis of audit modifications.

Firms receiving modified opinions have lower earnings persistence than firms receiving unqualified opinions, and the degree of earnings persistence varies among types of modifications. We find that firms with a qualified opinion or a disclaimer have lower earnings persistence than firms receiving an unqualified opinion with an emphasis of matter (UEM). However, we find no difference in earnings persistence between firms receiving a qualification and a disclaimer. Content analysis reveals that there is information in certain types of modified opinions with respect to earnings quality. Firms receiving a scope limitation qualification and a going concern disclaimer have lower earnings persistence than firms receiving an UEM due to going concern issues.

Audit modifications reflect different degrees of problematic issues in clients’ firms, resulting in different impacts on earnings persistence. Thus, policymakers and regulators should emphasize the importance of using auditors’ reports. Strengthened enforcement by regulators makes individual auditors more aware of reputation risk and more likely to express appropriate audit opinions.

We examine a broader set of modified audit opinions than those used in prior research. Our study offers the opportunity to examine the association between earnings persistence and different types of modified opinions, especially a disclaimer, which has been rarely found in prior research.