The Securities and Exchange Commission (SEC 2000) recently asserted that the litigation environment facing auditors has changed significantly since 1994, and that the reduced threat of litigation can influence auditor behavior. This study examines the potential impact of the “new” legal environment described by the SEC by examining the audit reports on 1,871 companies under financial stress during the years 1992–93, 1996–97, and 1999–2000. We find that after controlling for financial stress, company size, and default status, going‐concern audit reports were less likely (1) in 1996–97 than in 1992–93, and (2) in 1999–2000 than in 1996–97. Our results indicate that changes in the litigation environment are associated with the issuance of fewer going‐concern‐modified opinions to stressed companies in recent years. This finding is consistent with the SEC's claim that auditors' behavior in recent years has been influenced by reduced litigation pressures.