Auditor Tenure and Going Concern Opinions for Bankrupt Clients: Additional Evidence

2015 ◽  
Vol 35 (1) ◽  
pp. 163-179 ◽  
Author(s):  
William J. Read ◽  
Ari Yezegel
Keyword(s):  
House Of Representatives ◽  
Quadratic Model ◽  
Type Ii ◽  
Audit Failure ◽  
Going Concern ◽  
Auditor Tenure ◽  
Big 4 ◽  
Audit Firms ◽  
Discernible Effect ◽  
Audit Reports

SUMMARY Regulators and lawmakers in the U.S. periodically express concerns about a possible association between auditor tenure length and audit failure (SEC 1994; U.S. House of Representatives 2002). In this study, where we define audit failure as a bankrupt company not receiving a going concern modified audit opinion prior to bankruptcy (a Type II reporting error), we examine prior audit reports for a sample of 401 U.S. publicly held companies that filed for bankruptcy during the period 2002–2008. Using a quadratic model to control for potential nonlinearity in the relationship between auditor tenure and audit reporting, we find no significant association between auditor tenure and Type II errors for Big 4 audit firms. In contrast, for non-Big 4 audit firms we find evidence of a significant association that is nonlinear. Specifically, auditor tenure appears to adversely influence non-Big 4 firms' audit reporting for bankrupt clients in the initial years of an audit engagement and has no discernible effect in the later years. Thus, we provide evidence that long auditor tenure, of itself, is not associated with Type II reporting errors. In this respect, our findings may help to inform the continuing debate regarding the possible adverse effects of long auditor tenure. Overall, our results are robust to controlling for any extant endogeneity with respect to going concern opinions and choice of the length of audit firm tenure.

Audit Firm Size and Going-Concern Reporting Accuracy

2006 ◽  
Vol 20 (1) ◽  
pp. 1-17 ◽  
Author(s):  
Marshall A. Geiger ◽  
Dasaratha V. Rama
Keyword(s):  
Firm Size ◽  
Type I ◽  
Type Ii ◽  
Reporting Accuracy ◽  
Audit Firm ◽  
Reporting Error ◽  
Going Concern ◽  
Big 4 ◽  
Audit Firms ◽  
Second Tier

Prior research suggests that the Big 4 audit firms are of higher quality than are non-Big 4 firms. However, existing tests for an association between audit firm size and reporting accuracy are indirect and provide mixed results. Our study extends this line of research by examining whether the Big 4 audit firms exhibit higher quality reporting by having fewer “audit-reporting errors” in the context of issuing going-concern modified reports. Our analyses examine both types of going-concern reporting errors (i.e., type I errors—modified opinions rendered to subsequently viable clients; and type II errors—unmodified opinions rendered to subsequently bankrupt clients) over an 11-year period. We also examine reporting error rate differences between the national second-tier firms and regional/local third-tier firms. Our findings indicate that both type I and type II error rates for Big 4 audit firms are significantly lower compared to non-Big 4 firms. In contrast, we find no significant differences between the national second-tier and regional/local third-tier audit firms with respect to either type of reporting error. Our results provide evidence about a Big 4 audit quality difference in reporting on client's going-concern problems.

To be or not to be – auditors’ ability to signal going concern problems

2015 ◽  
Vol 11 (2) ◽  
pp. 175-192 ◽  
Author(s):  
Torbjörn Tagesson ◽  
Peter Öhman
Keyword(s):  
Audit Quality ◽  
Audit Fees ◽  
Annual Reports ◽  
Content Type ◽  
Going Concern ◽  
Big 4 ◽  
Audit Firms ◽  
Research Opportunity ◽  
Audit Reports ◽  
The Impact

Purpose – This paper aims to chart Swedish auditors’ likelihood of issuing going concern warnings (GCWs), and to investigate the relationship between formal auditor competence, audit fees and audit firm, respectively, and the likelihood of issuing GCWs. Design/methodology/approach – The empirical data are based on annual reports and audit reports for 2,547 limited companies that went bankrupt in 2010 in the wake of the financial crisis and had filed a financial statement in the year before the bankruptcy. Findings – The findings indicate that Swedish auditors seldom issue GCWs. Moreover, there is a positive relationship between audit fee level and the likelihood of issuing GCWs, and Big 4 auditors being more likely to issue such warnings than other auditors. However, the analyses identify differences between audit firms (within the group of Big 4 firms and within the group of other audit firms) in terms of their predictions of client bankruptcies. This suggests a need for further investigation of firm-specific differences. Contrary to what was predicted, authorized auditors are not more likely to issue GCWs than approved auditors. Research limitations/implications – This paper did not investigate the impact of audit experience and tenure or the possibility that auditors may signal survival problems by resigning. Practical implications – Levying appropriate audit fees creates opportunities for thorough audits, but auditors’ formal competence based on training and qualification is not a factor that enforces audit quality. Based on the findings, the authors also suggest some clarifications of existing standards to reduce ambiguity regarding the reporting of survival problems. Originality/value – The Swedish setting is a context in which most companies are small, creditor interest in accounting and auditing is strong and auditors must issue a modified audit opinion if half of the shareholders’ equity is spent. This setting offers a unique research opportunity because the formal competence differs between Sweden’s two categories of certified auditors, and it allows exploration beyond the dichotomy of Big 4 versus other audit firms.

The going-concern opinion and the adverse credit rating: an analysis of their relationship

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Matthew Strickett ◽  
David C. Hay ◽  
David Lau
Keyword(s):  
Credit Rating ◽  
Credit Ratings ◽  
Audit Report ◽  
Content Type ◽  
Ownership Structures ◽  
Going Concern ◽  
Big 4 ◽  
Audit Firms ◽  
Going Concern Opinion ◽  
Audit Reports

Purpose The purpose of this study is to examine the relationship between going-concern (GC) opinions issued by the Big 4 audit firms and adverse credit ratings from the two largest credit rating agencies (CRAs) – Standard & Poor’s (S&P) and Moody’s. This question is relevant because there have been suggestions that auditors and CRAs should become more similar to each other, and because the two largest CRAs have different ownership structures that could affect their ratings. Design/methodology/approach Univariate and multivariate analyses are performed using a sample of firms that filed for bankruptcy between January 1, 2002 and December 31, 2013 that also had an audit opinion signed during the 12 months prior to bankruptcy, along with a credit rating issued by either or both S&P and Moody’s. Both influence each other. The likelihood of an auditor issuing a GC opinion is related to the credit rating issued by both S&P and Moody’s in the month prior to the audit report signing. The results also show differences between the CRAs. S&P reacted in the month after an auditor issued a GC opinion by downgrading its ratings 68% of the time. However, Moody’s did not react as strongly as S&P, downgrading its ratings only 24% of the time. Findings Both audit reports and credit ratings influence each other. The likelihood of an auditor issuing a GC opinion is related to the credit rating issued by both S&P and Moody’s in the month prior to the audit report signing. The results also show differences between the CRAs. S&P reacted in the month after an auditor issued a GC opinion by downgrading its ratings 68% of the time. However, Moody’s did not react as strongly as S&P, downgrading its ratings only 24% of the time. Originality/value Auditors are more likely to issue GC opinions when there is a downgrade to the credit rating, and CRAs are more likely to downgrade their ratings when there is a GC opinion. The study highlights that CRAs with different ownership structures provide different credit rating outcomes.

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.

scholarly journals PENGARUH FAKTOR-FAKTOR PERSONAL TERHADAP SKEPTISISME PROFESIONAL AUDITOR

2017 ◽  
Vol 17 (1) ◽  
pp. 89
Author(s):  
Dessy Larimbi ◽  
Bambang Subroto ◽  
Rosidi Rosidi
Keyword(s):  
Personality Type ◽  
Sampling Technique ◽  
Personal Factors ◽  
Myers Briggs Type Indicator ◽  
Professional Skepticism ◽  
Auditor Tenure ◽  
Big 4 ◽  
Audit Firms ◽  
Type Indicator ◽  
The Impact

The purpose of this study was to test the impact of personal factors to auditor’s professional skepticism at Non Big 4 audit firms in East Java. Personal factors which tested in this study were personality type, auditor’s sex, and audit experience. Auditor’s personality types were classified based on Myers-Briggs Type Indicator (MBTI), audit experience was measured by auditor tenure, and auditor’s professional skepticism was measured by Hurtt (2010) professional skepticism scale. Sample used in this study were auditors at Non Big 4 audit firms in East Java, which selected by easy sampling technique (convenience sampling). Questionnaire was used as research instrument. Datas in this study were analyzed by multiple regression analysis. The results of this study indicate that INFP (introvert, intuition, feeling, perceiving) and ENFJ (extrovert, intuition, feeling, judging) personality type affects auditor’s professional skepticism. This study also found that audit experience affects auditor’s professional skepticism. The more experience an auditor, the higher the professional skepticism. On the other hand, sex differences of auditors at Non Big 4 audit firms in East Java turned out to have no effect on professional skepticism.

The Global Financial Crisis: U.S. Bankruptcies and Going-Concern Audit Opinions

2013 ◽  
Vol 28 (1) ◽  
pp. 59-75 ◽  
Author(s):  
Marshall A. Geiger ◽  
K. Raghunandan ◽  
William Riccardi
Keyword(s):  
Financial Crisis ◽  
Global Financial Crisis ◽  
Going Concern ◽  
Business Press ◽  
Big 4 ◽  
Audit Firms ◽  
Auditing Standards ◽  
Audit Opinions ◽  
The Global Financial Crisis

SYNOPSIS This study investigates whether auditors' going-concern modified opinion (GCO) decisions were less likely after the start of the recent “Global Financial Crisis” (GFC). Auditing regulators and the business press had complained that auditors did not provide adequate warning in their reports prior to many companies filing for bankruptcy during the GFC. Accordingly, we examine auditors' GCO opinions for financially stressed clients that subsequently entered into bankruptcy during the period from 2004 to 2010. We find that, after controlling for other factors related to GCOs, the propensity of auditors to issue a GCO prior to bankruptcy significantly increased after the onset of the GFC. Additional tests reveal similar results when we separately examine clients of the Big 4 and non-Big 4 firms, suggesting both sized firms significantly increased the likelihood of issuing a GCO to a subsequently bankrupt client after the start of the GFC. Our results should be of interest to regulators, investors, audit firms, academics, and standard setters as they evaluate U.S. auditor performance during the GFC, and in contemplation of changes to auditing standards as a result of the GFC.

scholarly journals Lost revenues associated with going concern modified opinions in the Swedish audit market

2014 ◽  
Vol 15 (2) ◽  
pp. 197-214 ◽  
Author(s):  
Jan Svanberg ◽  
Peter Öhman
Keyword(s):  
Practical Implication ◽  
Test Group ◽  
Small Companies ◽  
Content Type ◽  
Going Concern ◽  
Auditor Switching ◽  
Audit Market ◽  
Big 4 ◽  
Audit Firms ◽  
First Time

Purpose – The purpose of this paper is to examine the costs to audit firms in terms of lost revenues of losing small clients due to auditor switching or client bankruptcy after issuing first-time going concern modified opinions. Design/methodology/approach – A population of small Swedish companies receiving first-time going concern modified opinions in 2009 was examined to determine the effects two years later compared with a matched sample of financially stressed companies that had not received going concern modified opinions. Findings – The results indicate that both auditor switching and client bankruptcy are positively related to receipt of going concern modified opinions. Furthermore, the authors find empirical evidence that auditors issuing first-time going concern modified opinions lose proportionately more fees through auditor switching and client bankruptcy than do auditors not issuing such opinions to financially stressed clients. Finally, the authors found that the going concern modified opinions issued by Big 4 firms are no more harmful to clients than are those issued by other audit firms. Research limitations/implications – The authors recognize a limitation of this study regarding the choice of control companies. Although the authors attempted to find similarly sized and similarly financially stressed companies from the same industries as those companies in the test group, the authors may have missed other variables relevant to auditor switching or client bankruptcy. Practical implications – A practical implication for the audit profession is the increased awareness of the fact that the financial dependence issues reported in this study extend to auditors with small client companies. Originality/value – This is the first study to examine fees lost due to auditor switching and client bankruptcy caused by going concern modified opinions in a population of small companies. It contributes to the mixed evidence presented in previous research as to the extent to which going concern modified audit opinions are self-fulfilling prophecies.

Key audit matters: did IAASB unravel the knots of confusion in audit reports decisions?

2021 ◽  
Vol 36 (8) ◽  
pp. 1025-1052
Author(s):  
Mohamed Abdel Aziz Hegazy ◽  
Noha Mahmoud Kamareldawla
Keyword(s):  
Design Methodology ◽  
Financial Statements ◽  
Reporting Standards ◽  
Content Type ◽  
External Auditors ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Reports ◽  
The Relationship ◽  
Practical Implications

Purpose This study aims to investigate how external auditors properly classify the requirements of ISA 701 for key audit matters (KAM) compared with an emphasis of matter or other matters (EOM) in ISA 706 and going concern (GC) in ISAs 706 and 570. Such investigation is important to assess whether the explanatory matters included in ISAs 701, 706 and 570 are appropriate for external auditors so they can properly classify identified audit matters as either KAM, EOM or GC matters and considering the relationship among them. Design/methodology/approach The research used questionnaires sent to a sample of external auditors in five audit firms with international affiliations including two of the Big 4 audit firms. The Z-test for two proportions is conducted to assess whether external auditors were confused when interpreting the explanatory matters included in the ISAs. Findings The research suggests that the current ISA 701 explanations may not adequately help some auditors in their aim of properly identifying all KAM from among the different matters they reach during their audit. When classifying EOM and GC, most of the external auditors misclassified them as KAM. Practical implications This is a timely study. The results have implications for standard setters and regulators through revising the explanations included in the different audit reporting standards including ISA 701 and considering the relationships among them. Originality/value According to the authors’ knowledge, this study is considered among the first that surveyed the appropriateness of the explanations included in ISAs for KAM, EOM, GC and how auditors perceive such explanations when forming their opinion about their clients’ financial statements.

scholarly journals Auditor Fees and Going-Concern Reporting Decisions on Bankrupt Companies: Additional Evidence

2015 ◽  
Vol 9 (1) ◽  
pp. A13-A27 ◽  
Author(s):  
William J. Read
Keyword(s):  
Audit Fees ◽  
Auditor Independence ◽  
Data Availability ◽  
Audit Failure ◽  
The Public ◽  
Going Concern ◽  
Audit Firms ◽  
Public Company ◽  
Reporting Decisions ◽  
Auditor Fees

SUMMARY The recent growth in non-audit services (NAS) at the major audit firms has the attention of auditing regulators. On several occasions recently, board members of the Public Company Accounting Oversight Board (PCAOB) have indicated that the rise in NAS may place auditor independence at risk (Harris 2014; Tysiac 2014). Impaired independence can result in audit failure, which includes situations when auditors fail to issue going-concern (GC) audit opinions to soon-to-be bankrupt companies. In this paper, I examine the association between the propensity of auditors to issue GC opinions and NAS fees (and audit fees) to 203 bankrupt companies during 2002–2013. In analysis, I find no significant relation between GC decisions and NAS fees and audit fees. My results may interest U.S. regulators, who recently expressed concerns about the threat to auditor independence from the spike in NAS at the major firms. Data Availability: Publicly available from sources identified in the paper.

Big 4 Office Size and Audit Quality

2009 ◽  
Vol 84 (5) ◽  
pp. 1521-1552 ◽  
Author(s):  
Jere R. Francis ◽  
Michael D. Yu
Keyword(s):  
Risk Factors ◽  
Earnings Management ◽  
Audit Quality ◽  
Management Behavior ◽  
Going Concern ◽  
Big 4 ◽  
Client Risk ◽  
Office Size ◽  
Audit Reports ◽  
Auditor Characteristics

ABSTRACT: Larger offices of Big 4 auditors are predicted to have higher quality audits for SEC registrants due to greater in-house experience in administering such audits. We test this prediction by examining a sample of 6,568 U.S. firm-year observations for the period 2003–2005 and audited by 285 unique Big 4 offices. Results are consistent with larger offices providing higher quality audits. Specifically, larger offices are more likely to issue going-concern audit reports, and clients in larger offices evidence less aggressive earnings management behavior. These findings are robust to extensive controls for client risk factors and to controls for other auditor characteristics. While the evidence suggests audit quality is higher on average in larger Big 4 offices, we make no claims that audit quality is unacceptably low in smaller offices.

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