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.

scholarly journals Audit Committee Accounting Expertise and Audit Quality – the Case of Going-Concern Opinions

2021 ◽  
Vol 10 (3) ◽  
pp. 27
Author(s):  
Gnanakumar Visvanathan
Keyword(s):  
Audit Committee ◽  
Audit Quality ◽  
Audit Committees ◽  
Type I ◽  
Type I Errors ◽  
Going Concern ◽  
Sarbanes Oxley ◽  
Prior Literature ◽  
Accounting Expertise ◽  
Going Concern Reports

This study examines whether audit committee accounting expertise and other audit committee characteristics promote or deter the likelihood of receiving going-concern reports from the auditors and whether such characteristics shield auditors from dismissals after the issuance of a going-concern report. The study finds no significant association between the likelihood of a going-concern report and audit committee accounting expertise or other audit committee characteristics. No significant association is also found for auditor dismissals following going-concern reports and audit committee accounting expertise. These results contrast with prior literature that examined data preceding the passage of the Sarbanes-Oxley Act of 2002 (hereafter SOX) or the period immediately thereafter. Additional analysis shows that audit committee accounting expertise is found to improve the information in going-concern audit opinions by reducing Type I errors, however. Overall, these findings shed light on the evolving role of audit committees in overseeing the auditors and have implications for regulators interested in improving audit quality and investors interested in improving the effectiveness of audit committees. 

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.

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.

Auditor Size and Going Concern Reporting

2018 ◽  
Vol 37 (2) ◽  
pp. 1-25 ◽  
Author(s):  
Nathan R. Berglund ◽  
John Daniel Eshleman ◽  
Peng Guo
Keyword(s):  
Type I Error ◽  
Type I ◽  
Type Ii ◽  
Type Ii Error ◽  
Financial Health ◽  
Positive Type ◽  
Going Concern ◽  
Big 4 ◽  
Going Concern Opinion ◽  
Matching Techniques

SUMMARY Auditing theory predicts that larger auditors will be more likely to issue a going concern opinion to a distressed client. However, the existing empirical evidence on this issue is mixed. We attribute these mixed results to a failure to adequately control for clients' financial health. We demonstrate how properly controlling for clients' financial health reveals a positive relationship between auditor size and the propensity to issue a going concern opinion. We corroborate our findings by replicating a related study and showing how the results change when financial health variables are added to the model. In supplemental analysis, we find that Big 4 auditors are more likely than mid-tier auditors (Grant Thornton and BDO Seidman) to issue going concern opinions to distressed clients. We also find that, compared to other auditors, the Big 4 are less likely to issue false-positive (Type I error) going concern opinions. We find no evidence that the Big 4 are more or less likely to fail to issue a going concern opinion to a client that eventually files for bankruptcy (Type II error). Our results are robust to the use of a variety of matching techniques. JEL Classifications: M41; M42.

There's No Place Like Home: The Influence of Home-State Going-Concern Reporting Rates on Going-Concern Opinion Propensity and Accuracy

2015 ◽  
Vol 35 (2) ◽  
pp. 23-51 ◽  
Author(s):  
Allen D. Blay ◽  
James R. Moon ◽  
Jeffrey S. Paterson
Keyword(s):  
Audit Quality ◽  
Type I Error ◽  
State Level ◽  
Error Rates ◽  
Data Availability ◽  
Type I ◽  
Going Concern ◽  
Going Concern Opinion ◽  
Financial Characteristics ◽  
First Time

SUMMARY Prior research has had success identifying client financial characteristics that influence auditors' going-concern reporting decisions. In contrast, relatively little research has addressed whether auditors' circumstances and surroundings influence their propensities to issue modified opinions. We investigate whether auditors' decisions to issue GC opinions are affected by the rate of GC opinions being given in their proximate area. Controlling for factors that prior research associates with going-concern opinions and state-level economics, we find that non-Big 4 auditors located in states with relatively high first-time going-concern rates in the prior year are up to 6 percent more likely to issue first-time going-concern opinions. The results from our state-based GC measure casts doubt that this increased propensity is explained by economic factors and suggests that psychological factors may explain this behavior among auditors. Interestingly, this higher propensity increases auditors' Type I error rates without decreasing their Type II error rates, further suggesting economics alone do not explain these results. Such evidence challenges the generally accepted notion that a higher propensity to issue a going-concern opinion always reflects higher audit quality. JEL Classifications: M41; M42. Data Availability: All data are available from public sources.

Audit Firms as Networks of Offices

2017 ◽  
Vol 37 (3) ◽  
pp. 211-242 ◽  
Author(s):  
Scott E. Seavey ◽  
Michael J Imhof ◽  
Tiffany J. Westfall
Keyword(s):  
Knowledge Management ◽  
Knowledge Sharing ◽  
Network Effects ◽  
Audit Quality ◽  
Discretionary Accruals ◽  
Big 4 ◽  
Audit Firms ◽  
Network Connectedness ◽  
Partner Knowledge ◽  
Office Level

SUMMARY Prior audit research suggests that most, if not all, audit quality can be explained at the office level. However, the question remains of whether office-level audit quality is contingent on how individual offices relate to the firm as a whole. Motivated by theories of knowledge management, organizational learning, and networks, we posit that individual offices are connected to their audit network through partner knowledge sharing and oversight, which impact office-level audit quality. We interview Big 4 audit partners and learn that knowledge sharing between partners in different offices is common and intended to aid in the provision of audit services. Using network connectedness to proxy for knowledge sharing and oversight between offices of the same firm, we document that more connected offices are associated with fewer client restatements and lower discretionary accruals. We additionally find that network effects are magnified when accounting treatments are more complex and require greater auditor judgement.

The effect of real activities manipulation on going concern audit opinions for financially distressed companies

2018 ◽  
Vol 17 (4) ◽  
pp. 514-539
Author(s):  
Hongkang Xu ◽  
Mai Dao ◽  
Jia Wu
Keyword(s):  
Audit Quality ◽  
Positive Association ◽  
Content Type ◽  
Going Concern ◽  
Accruals Management ◽  
Reporting Decisions ◽  
Going Concern Opinion ◽  
Distressed Firms ◽  
Real Activities Manipulation ◽  
Auditor Reporting

Purpose This study aims to examine the effect of real activities manipulation (RAM) on auditors’ decision of issuing going concern (GC) opinions for distressed companies. Design/methodology/approach This study estimates and examines three types of RAM: reduction of discretionary expenses, sales manipulation and overproduction. It investigates the effect of RAM on auditor reporting conservatism by including the three measures of RAM methods in logistic regressions that explain the issuance of going concern opinions. The authors perform the analysis specifically on distressed firms for 2004-2013 period. Findings This study finds a significant and positive association between RAM and the likelihood of receiving going concern opinion in the financial distressed firm sample, suggesting that client’s abnormal business activity affects the auditor reporting conservatism. Practical implications This study provides evidence that auditors make going concern reporting decisions in consideration of the client’s abnormal operating decisions and management’s opportunism. Originality/value Recent literature argues that auditors have little recourse other than to resign if a client uses RAM to impact earnings or the financial statements, and hence the enhanced audit quality in the post-SOX period is due to the shift from using accruals management to RAM (Cohen et al., 2008; Chi et al., 2011; Kim and Park, 2014). The evidence provided in this study indicates that auditors report more conservatively (rather than simply resign) in response to the aggressive RAM.

The analysis of influencing factors on the going concern audit opinion – a study in manufacturing firms in Indonesia

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Thomas Averio
Keyword(s):  
Audit Quality ◽  
Stock Exchange ◽  
Secondary Data ◽  
Sampling Technique ◽  
Manufacturing Firms ◽  
Annual Reports ◽  
Content Type ◽  
Audit Opinion ◽  
Going Concern ◽  
Going Concern Opinion

PurposeIt is argued that the going concern opinion is issued if auditors have a doubt about financial condition of a company. Provision of the going concern audit opinion may worsen the company in terms of gaining public trust and may even indicate bankruptcy. This study aims to determine the factors that affect the auditor's going concern opinion.Design/methodology/approachThis research used secondary data obtained from annual reports and independent audit reports published by the Indonesia Stock Exchange. The population of this research included manufacturing firms registered in the Indonesia Stock Exchange from 2015 to 2019. The sample after the purposive sampling technique being applied consisted of 33 companies. The data were analyzed using logistic regression performed in the statistical analysis software, SPSS 24.0.FindingsThe results indicated that leverage positively affected the going concern audit opinion, then the audit quality, profitability and liquidity negatively affected the going concern audit opinion, whereas firm size and audit lag did not affect the going concern audit opinion.Originality/valueThis study is in contrast to several existing studies on the determinants of the auditor's going concern opinion and provides knowledge on developing more factors affecting the auditor's going concern opinion.

scholarly journals Does Auditor Tenure Reduce Audit Quality?

2012 ◽  
Vol 14 (3) ◽  
pp. 303 ◽  
Author(s):  
Junaidi ◽  
Setiyono Miharjo ◽  
Bambang Hartadi
Keyword(s):  
Audit Quality ◽  
Stock Exchange ◽  
Financial Statements ◽  
Auditor Independence ◽  
Going Concern ◽  
Auditor Tenure ◽  
Client Relationship ◽  
Going Concern Opinion ◽  
Research Analysis ◽  
Public Accountant

Reduced auditor independence and the rise of corporate accounting manipulations have caused trust of the users in audited financial statements to begin to decline, so users of financial statements are questioning whether public accountants are independent parties. This research issue is related to the Decree of the Minister of Finance No. 17 in 2008 about public accountant services. Giving attestation services, in the form of financial statements about an entity, are conducted by the audit firm for no longer than 6 consecutive fiscal years and by a public accountant for 3 consecutive fiscal years at the longest. The purpose of this research is to examine empirically the influence of auditor tenure on audit quality. Auditor tenure is measured as the length of the auditor-client relationship. Audit quality is measured by the propensity of auditors to issue a going-concern opinion. This study uses a sample of firms listed on the Indonesia Stock Exchange during the 2003-2008 period. Research analysis uses logit model to measure the effect of auditor tenure on the auditors’ propensity to publish a going-concern opinion. The hypothesis which states that the length of auditor tenure influences negatively the propensity of auditors to issue a going-concern opinion is statistically supported. This research is expected to provide empirical evidence about the importance of limiting of the auditor-client relationship.       

scholarly journals An Analysis of Auditors' Going-Concern Reporting Accuracy in Private Firms

2018 ◽  
Vol 32 (4) ◽  
pp. 117-132 ◽  
Author(s):  
Kris Hardies ◽  
Marie-Laure Vandenhaute ◽  
Diane Breesch
Keyword(s):  
Large Scale ◽  
Audit Quality ◽  
Private Firms ◽  
Reporting Accuracy ◽  
Public Firms ◽  
Going Concern ◽  
Big 4 ◽  
Cast Doubt ◽  
One Year ◽  
Audit Reports

SYNOPSIS The accuracy of audit reports is often viewed as a signal for audit quality. Prior research shows that in the context of going-concern reporting in audit markets dominated by public firms, some auditors are more accurate than others (e.g., Big N firms). This study is the first large-scale study that investigates going-concern reporting accuracy in an audit market dominated by private firms. The threat of reputation and litigation costs incentivizes auditors to report accurately in markets dominated by public firms, but such incentives are largely absent in markets dominated by private firms. Hence, reporting accuracy in such markets might not vary across auditors. Our main analysis is based on a sample of 1,375 Belgian firms that ceased to exist within one year from the financial statement date. Our results show that the frequency of Type II misclassification does not vary across auditor types (Big 4 versus non-Big 4, audit firm and partner industry specialists versus non-specialists, more experienced versus less experienced, and female versus male auditors). Overall, these results cast doubt on the existence of quality differences among auditors in audit markets dominated by private firms.

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