TY - JOUR
T1 - Are going-concern issues disclosed in audit reports associated with subsequent bankruptcy? Evidence from the United States
AU - Desai, Vikram
AU - Desai, Renu
AU - Kim, Joung W.
AU - Raghunandan, Kannan
N1 - Publisher Copyright:
© 2020 John Wiley & Sons Ltd
PY - 2020/3/1
Y1 - 2020/3/1
N2 - The Public Company Accounting Oversight Board (PCAOB) has expressed interest in the following issues related to going-concern modified audit opinions (GCOs): auditor's communication of factors that led to the GCO, the role of liquidity versus other factors in GCOs, and the subsequent failures of clients with GCOs. We use a sample of 2,921 first-time GCOs spanning the years 1999 to 2015 in the United States and find that profitability factors are cited in 81% of GCOs while liquidity issues are cited in 56% of GCOs. Overall, 16.8% of the first-time GCO clients entered bankruptcy within one year. After controlling for the probability of bankruptcy, client size, and auditor type, for clients of Big N auditors, the disclosure of profitability factors in the GCO is associated with a higher likelihood of subsequent bankruptcy; in contrast, for clients of non–Big N auditors, disclosures of liquidity and solvency problems are associated with a higher likelihood of subsequent bankruptcy. Our findings provide an empirical grounding for the debates surrounding GCOs and provide useful information for standard-setters and financial statement users.
AB - The Public Company Accounting Oversight Board (PCAOB) has expressed interest in the following issues related to going-concern modified audit opinions (GCOs): auditor's communication of factors that led to the GCO, the role of liquidity versus other factors in GCOs, and the subsequent failures of clients with GCOs. We use a sample of 2,921 first-time GCOs spanning the years 1999 to 2015 in the United States and find that profitability factors are cited in 81% of GCOs while liquidity issues are cited in 56% of GCOs. Overall, 16.8% of the first-time GCO clients entered bankruptcy within one year. After controlling for the probability of bankruptcy, client size, and auditor type, for clients of Big N auditors, the disclosure of profitability factors in the GCO is associated with a higher likelihood of subsequent bankruptcy; in contrast, for clients of non–Big N auditors, disclosures of liquidity and solvency problems are associated with a higher likelihood of subsequent bankruptcy. Our findings provide an empirical grounding for the debates surrounding GCOs and provide useful information for standard-setters and financial statement users.
KW - Audit Opinion
KW - Bankruptcy
KW - Going Concern
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U2 - 10.1111/ijau.12183
DO - 10.1111/ijau.12183
M3 - Article
AN - SCOPUS:85078041656
SN - 1090-6738
VL - 24
SP - 131
EP - 144
JO - International Journal of Auditing
JF - International Journal of Auditing
IS - 1
ER -