In this work, acoustic emission during scratch testing of the aluminum nitride coatings formed on stainless steel substrate by reactive magnetron sputtering was analyzed to assess the coating failure. The AlN coatings were formed under the variation of substrate temperature, substrate bias potential, and discharge power. The coatings deposited in the temperature range of 100 to 400 °C showed peak acoustic emission less than 1.5%, indicating ductile nature of the coating. However, for coatings formed with substrate negative bias potential of 20 to 50 V, numerous sharp acoustic bursts with maximum emission approaching 80% were observed, indicating brittle nature of the coatings with large number of defects present. The shift in the intensity of the first major acoustic peak toward higher load, with the increasing bias potential, confirmed improved adhesion of the coating. Also, the higher discharge power resulted in increased acoustic emission.