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<p>Regulatory enforcement outcomes and public restatements provide externally observable signs of failures in financial reporting credibility, yet audit-risk research often conflates latent ex ante risk with ex post outcomes and commonly relies on flat specifications that do not test institutional context empirically. This study develops an enforcement-linked firm-year risk flag for UK-listed firms over 2016–2022 and examines whether firm size, leverage, audit tenure, and profitability are associated with that observable flag when industry-level clustering is modeled explicitly. Using 778 firm-year observations, including 190 high-risk flags (24.4%), the analysis estimates pooled logit and industry fixed-effects logit benchmarks and then evaluates an industry random-intercept logistic mixed model. Across the classical logit benchmarks, larger firms, longer audit tenure, and weaker profitability are consistently associated with a higher probability of enforcement-linked classification. Leverage is positive in the mixed model but not robust across the benchmark estimators, and Big Four status is not informative once other firm-level characteristics are controlled. The mixed model yields the same directional pattern for firm size, audit tenure, and profitability and indicates modest residual industry heterogeneity (industry SD 0.309; implied variance 0.096; ICC 0.028). Checks using a stricter event screen, simulated 5%–15% label-noise scenarios, and alternative links preserve the main sign pattern, whereas a one-year-lag sensitivity is materially weaker, implying reporting-cycle visibility rather than durable forward prediction in this setting.</p>

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Enforcement-linked audit risk classification in UK-listed firms: multilevel evidence from pooled public adverse signals (2016–2022)

  • 期刊论文

  • 发表日期：

    2026年5月22日

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  • Amer Morshed,
  • Bassam Maali,
  • Ayman Bader

摘要

Regulatory enforcement outcomes and public restatements provide externally observable signs of failures in financial reporting credibility, yet audit-risk research often conflates latent ex ante risk with ex post outcomes and commonly relies on flat specifications that do not test institutional context empirically. This study develops an enforcement-linked firm-year risk flag for UK-listed firms over 2016–2022 and examines whether firm size, leverage, audit tenure, and profitability are associated with that observable flag when industry-level clustering is modeled explicitly. Using 778 firm-year observations, including 190 high-risk flags (24.4%), the analysis estimates pooled logit and industry fixed-effects logit benchmarks and then evaluates an industry random-intercept logistic mixed model. Across the classical logit benchmarks, larger firms, longer audit tenure, and weaker profitability are consistently associated with a higher probability of enforcement-linked classification. Leverage is positive in the mixed model but not robust across the benchmark estimators, and Big Four status is not informative once other firm-level characteristics are controlled. The mixed model yields the same directional pattern for firm size, audit tenure, and profitability and indicates modest residual industry heterogeneity (industry SD 0.309; implied variance 0.096; ICC 0.028). Checks using a stricter event screen, simulated 5%–15% label-noise scenarios, and alternative links preserve the main sign pattern, whereas a one-year-lag sensitivity is materially weaker, implying reporting-cycle visibility rather than durable forward prediction in this setting.