Auditor Going Concern Opinions and Bank Systemic Risk: Evidence from the 2007–2009 Financial Crisis

2020 ◽  
Vol 39 (3) ◽  
pp. 1-28
Author(s):  
Anne Albrecht ◽  
Matthew Glendening ◽  
Kyonghee Kim ◽  
Raynolde Pereira
Keyword(s):  
Financial Crisis ◽  
Systemic Risk ◽  
Spillover Effects ◽  
Type I ◽  
Litigation Risk ◽  
Type I Errors ◽  
Crisis Period ◽  
Going Concern ◽  
Big 4 ◽  
Type Ii Errors

SUMMARY Following the 2007–2009 financial crisis, regulators and investor groups alleged that auditors were reluctant to issue going concern opinions (GCOs) to distressed banks during the crisis, raising questions about the quality of auditors' GCO decisions. This paper investigates whether systemic risk influences auditors' GCO decisions during the crisis due to potential adverse spillover effects. Using 496 bank-year observations, we find that auditors are less likely to issue a GCO to systemically risky banks, and this auditor behavior reduces Type I errors without increasing Type II errors. The effects are more pronounced during the crisis period, especially for banks that are large and connected, have lower litigation risk, or are audited by Big 4 auditors or industry specialists. Overall, our findings suggest that during the crisis period, auditors were less likely to over-issue GCOs to systemically risky banks, resulting in more accurate GCOs. JEL Classifications: M42; G20.

Consequences of Going-Concern Opinion Inaccuracy at the Audit Office Level

2020 ◽  
Vol 39 (3) ◽  
pp. 185-208
Author(s):  
Qiao Xu ◽  
Rachana Kalelkar
Keyword(s):  
Market Share ◽  
Audit Quality ◽  
Type I ◽  
Type I Errors ◽  
Negatively Associated ◽  
Going Concern ◽  
Big 4 ◽  
Office Market ◽  
Going Concern Opinion ◽  
Office Level

SUMMARY This paper examines whether inaccurate going-concern opinions negatively affect the audit office's reputation. Assuming that clients perceive the incidence of going-concern opinion errors as a systematic audit quality concern within the entire audit office, we expect these inaccuracies to impact the audit office market share and dismissal rate. We find that going-concern opinion inaccuracy is negatively associated with the audit office market share and is positively associated with the audit office dismissal rate. Furthermore, we find that the decline in market share and the increase in dismissal rate are primarily associated with Type I errors. Additional analyses reveal that the negative consequence of going-concern opinion inaccuracy is lower for Big 4 audit offices. Finally, we find that the decrease in the audit office market share is explained by the distressed clients' reactions to Type I errors and audit offices' lack of ability to attract new clients.

Rules Rather than Discretion in Audit Standards: Going-Concern Opinions in Belgium

2009 ◽  
Vol 84 (5) ◽  
pp. 1395-1428 ◽  
Author(s):  
Joseph V. Carcello ◽  
Ann Vanstraelen ◽  
Michael Willenborg
Keyword(s):  
Board Of Directors ◽  
Type I ◽  
Type Ii ◽  
Type I Errors ◽  
Going Concern ◽  
Major Revision ◽  
Ex Post ◽  
Type Ii Errors ◽  
Audit Standards ◽  
Ex Post Analysis

ABSTRACT: We study going-concern (GC) reporting in Belgium to examine the effects associated with a shift toward rules-based audit standards. Beginning in 2000, a major revision in Belgian GC audit standards took effect. Among its changes, auditors must ascertain whether their clients are in compliance with two “financial-juridical criteria” for board of directors' GC disclosures. In a study of a sample of private Belgian companies, we report two major findings. First, there is a decrease in auditor Type II errors, particularly by non-Big 6/5 auditors for their clients that fail both criteria. Second, there is an increase in Type I errors, again particularly for companies that fail both criteria. We also conduct an ex post analysis of the decrease in Type II errors and the increase in Type I errors. Our findings suggest the standard engenders both favorable and unfavorable effects, the net of which depends on the priorities assigned to the affected parties (creditors, auditors, companies, and employees).

Managerial Ability and the Accuracy of the Going Concern Opinion

2018 ◽  
Vol 18 (1) ◽  
pp. 29-52 ◽  
Author(s):  
Nathan R. Berglund ◽  
Donald R. Herrmann ◽  
Bradley P. Lawson
Keyword(s):  
Type I ◽  
Type Ii ◽  
Managerial Ability ◽  
Type I Errors ◽  
Bankruptcy Risk ◽  
Going Concern ◽  
Information Signal ◽  
Going Concern Opinion ◽  
Prior Literature ◽  
Type Ii Errors

ABSTRACT Current audit guidance directs the auditor to modify their opinion in the presence of significant doubt about their client's ability to continue as a going concern. This paper examines whether managerial ability influences the accuracy of auditors' going concern information signal. Following prior literature, we assess accuracy based on the subsequent viability of the client. We find that, while managerial ability decreases the risk of Type I errors (the auditor issues a going concern opinion for a firm that subsequently remains viable), managerial ability increases the risk of Type II errors (the auditor issues a standard unqualified report for a firm that subsequently files for bankruptcy). Considering prior research indicates that the auditor's opinion provides important information to the market, this finding has important public interest implications regarding the signaling of bankruptcy risk to investors and creditors by auditors' going concern opinion.

The Effect of Stage of Development and Financial Health on Auditor Decision Behavior in the Going-Concern Task

1999 ◽  
Vol 18 (1) ◽  
pp. 37-54 ◽  
Author(s):  
Andrew J. Rosman ◽  
Inshik Seol ◽  
Stanley F. Biggs
Keyword(s):  
Information Acquisition ◽  
Type I ◽  
Type Ii ◽  
Financial Health ◽  
Inference Problem ◽  
Going Concern ◽  
Start Up ◽  
Mitigating Factors ◽  
Type Ii Errors ◽  
Problem Representations

The effect of different task settings within an industry on auditor behavior is examined for the going-concern task. Using an interactive computer process-tracing method, experienced auditors from four Big 6 accounting firms examined cases based on real data that differed on two dimensions of task settings: stage of organizational development (start-up and mature) and financial health (bankrupt and nonbankrupt). Auditors made judgments about each entity's ability to continue as a going concern and, if they had substantial doubt about continued existence, they listed evidence they would seek as mitigating factors. There are seven principal results. First, information acquisition and, by inference, problem representations were sensitive to differences in task settings. Second, financial mitigating factors dominated nonfinancial mitigating factors in both start-up and mature settings. Third, auditors' behavior reflected configural processing. Fourth, categorizing information into financial and nonfinancial dimensions was critical to understanding how auditors' information acquisition and, by inference, problem representations differed across settings. Fifth, Type I errors (determining that a healthy company is a going-concern problem) differed from correct judgments in terms of information acquisition, although Type II errors (determining that a problem company is viable) did not. This may indicate that Type II errors are primarily due to deficiencies in other stages of processing, such as evaluation. Sixth, auditors who were more accurate tended to follow flexible strategies for financial information acquisition. Finally, accurate performance in the going-concern task was found to be related to acquiring (1) fewer information cues, (2) proportionately more liquidity information and (3) nonfinancial information earlier in the process.

scholarly journals An Improved Progressive TIN Densification Filtering Method Considering the Density and Standard Variance of Point Clouds

2018 ◽  
Vol 7 (10) ◽  
pp. 409 ◽  
Author(s):  
Youqiang Dong ◽  
Ximin Cui ◽  
Li Zhang ◽  
Haibin Ai
Keyword(s):  
Point Clouds ◽  
High Density ◽  
Type I ◽  
Densification Process ◽  
Type I Errors ◽  
Second Stage ◽  
Standard Variance ◽  
Triangular Irregular Network ◽  
Two Stages ◽  
Type Ii Errors

The progressive TIN (triangular irregular network) densification (PTD) filter algorithm is widely used for filtering point clouds. In the PTD algorithm, the iterative densification parameters become smaller over the entire process of filtering. This leads to the performance—especially the type I errors of the PTD algorithm—being poor for point clouds with high density and standard variance. Hence, an improved PTD filtering algorithm for point clouds with high density and variance is proposed in this paper. This improved PTD method divides the iterative densification process into two stages. In the first stage, the iterative densification process of the PTD algorithm is used, and the two densification parameters become smaller. When the density of points belonging to the TIN is higher than a certain value (in this paper, we define this density as the standard variance intervention density), the iterative densification process moves into the second stage. In the second stage, a new iterative densification strategy based on multi-scales is proposed, and the angle threshold becomes larger. The experimental results show that the improved PTD algorithm can effectively reduce the type I errors and total errors of the DIM point clouds by 7.53% and 4.09%, respectively, compared with the PTD algorithm. Although the type II errors increase slightly in our improved method, the wrongly added objective points have little effect on the accuracy of the generated DSM. In short, our improved PTD method perfects the classical PTD method and offers a better solution for filtering point clouds with high density and standard variance.

scholarly journals Statistical Methods for Banking Sectors to Detect the Eligible Customers for Home Loan

2019 ◽  
Vol 8 (4) ◽  
pp. 1849-1853
Keyword(s):  
Sensitivity Analysis ◽  
Statistical Methods ◽  
Sensitivity And Specificity ◽  
Categorical Variables ◽  
Type I ◽  
Type Ii ◽  
Type I Errors ◽  
Fuzzy Analysis ◽  
Type Ii Errors

Nowadays people are interested to avail loans in banks for their needs, but providing loans to all people is not possible to banks, so they are using some measures to identify eligible customers. To measure the performance of categorical variables sensitivity and specificity are widely used in Medical and tangentially in econometrics, after using some measures also if banks provide the loans to the wrong customers whom might not able to repay the loans, and not providing to customers who can repay will lead to the type I errors and type II errors, to minimize these errors, this study explains one, how to know sensitivity is large or small and second to study the bench marks on forecasting the model by Fuzzy analysis based on fuzzy based weights and it is compared with the sensitivity analysis.

Connectedness Among Economic Policy Uncertainties: Evidence from the Time and Frequency Domain Perspectives

2020 ◽  
Vol 8 (5) ◽  
pp. 401-433
Author(s):  
Jinxin Cui ◽  
Huiwen Zou
Keyword(s):  
Economic Policy ◽  
Financial Crisis ◽  
Spillover Effects ◽  
The United States ◽  
Practical Significance ◽  
Policy Uncertainty ◽  
The Novel ◽  
Short Term ◽  
Economic Policy Uncertainty ◽  
Crisis Period

AbstractThis paper investigates the frequency connectedness among economic policy uncertainties of G20 countries using the novel frequency connectedness proposed by Barunik and Krehlik (2018) which can depict the dynamic connectedness not only over time but also across different frequencies. The empirical results obtained in this paper demonstrate that, firstly, the connectedness among economic policy uncertainties is significant, and the spillover effects during the financial crisis and the post-financial crisis period are stronger than the pre-financial crisis period. Secondly, the United States, France, and Australia are the main net-transmitters of the economic policy uncertainty spillovers while Brazil, Italy, Mexico, and Russia act as the main net-recipients of the spillovers. Thirdly, the major international events may significantly enhance the spillover transmissions of economic policy uncertainty among different countries, thus increasing the magnitude of the total connectedness. Finally, the economic policy uncertainty spillovers are mainly transmitted in the short term, i.e., 1∼4 months instead of longer time horizons in terms of the magnitude of the frequency connectedness measures. The findings of this paper not only have profound theoretical and practical significance but also provide several significant implications for the policymakers, supervision agents, international traders, and various investors.

The effect of financial crisis on auditor conservatism: US evidence

2015 ◽  
Vol 28 (2) ◽  
pp. 160-171 ◽  
Author(s):  
Joseph Beams ◽  
Yun-Chia Yan
Keyword(s):  
Financial Crisis ◽  
Design Methodology ◽  
Environmental Changes ◽  
Accounting Firms ◽  
Content Type ◽  
Going Concern ◽  
Big 4 ◽  
Distressed Firms ◽  
Recent Financial Crisis ◽  
Auditor Conservatism

Purpose – This paper aims to examine the effect that the recent financial crisis had on auditor conservatism in the form of increased going-concern opinions. Design/methodology/approach – This study uses a sample of US’ distressed firms from 2005 to 2011 to test the change in going-concern opinions issued. This paper uses a logistic regression model to control for other predictors of going-concern opinions to determine when the financial crisis led to an increase in auditor conservatism. Findings – The authors find that auditors became more conservative in the form of issuing higher levels of going-concern opinions even after controlling for other predictors of going-concern opinions. This increased conservatism was present in both Big 4 and non-Big 4 accounting firms. The increased conservatism quickly returned to normal levels when the financial crisis eased. Originality/value – These findings add to the literature on the effects of environmental changes on audit opinions. Additionally, this study finds a difference in the timing of the reaction by large and small accounting firms, but, overall, it finds consistency in that both increased conservatism during the crisis and quickly returned to normal afterward.

scholarly journals Tropical Cyclones and Climate Change Assessment: Part I: Detection and Attribution

2019 ◽  
Vol 100 (10) ◽  
pp. 1987-2007 ◽  
Author(s):  
Thomas Knutson ◽  
Suzana J. Camargo ◽  
Johnny C. L. Chan ◽  
Kerry Emanuel ◽  
Chang-Hoi Ho ◽  
...  
Keyword(s):  
Climate Change ◽  
Historical Data ◽  
False Alarms ◽  
Type I ◽  
Anthropogenic Influence ◽  
Type Ii ◽  
Type I Errors ◽  
Detection And Attribution ◽  
Climate Change Assessment ◽  
Type Ii Errors

AbstractAn assessment was made of whether detectable changes in tropical cyclone (TC) activity are identifiable in observations and whether any changes can be attributed to anthropogenic climate change. Overall, historical data suggest detectable TC activity changes in some regions associated with TC track changes, while data quality and quantity issues create greater challenges for analyses based on TC intensity and frequency. A number of specific published conclusions (case studies) about possible detectable anthropogenic influence on TCs were assessed using the conventional approach of preferentially avoiding type I errors (i.e., overstating anthropogenic influence or detection). We conclude there is at least low to medium confidence that the observed poleward migration of the latitude of maximum intensity in the western North Pacific is detectable, or highly unusual compared to expected natural variability. Opinion on the author team was divided on whether any observed TC changes demonstrate discernible anthropogenic influence, or whether any other observed changes represent detectable changes. The issue was then reframed by assessing evidence for detectable anthropogenic influence while seeking to reduce the chance of type II errors (i.e., missing or understating anthropogenic influence or detection). For this purpose, we used a much weaker “balance of evidence” criterion for assessment. This leads to a number of more speculative TC detection and/or attribution statements, which we recognize have substantial potential for being false alarms (i.e., overstating anthropogenic influence or detection) but which may be useful for risk assessment. Several examples of these alternative statements, derived using this approach, are presented in the report.

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