Auditor Conservatism after Enron

Abstract

SUMMARY: Corporate scandals and the resulting passage of the Sarbanes-Oxley Act (SOX) in 2002 significantly affected the auditing profession. The quality of financial statement audits was called into questioned and the media and regulators held audit firms responsible. Several studies found evidence of an increase in the issuance of going-concern opinions after the passage of SOX relative to earlier time periods (Geiger et al. 2005; Nogler 2008; Myers et al. 2008). Auditors, it appears, behave more conservatively when the profession is in the headlines. We replicate and extend this research to determine whether the heightened conservatism continues or whether it fades as time passes. We examine audit opinions issued 12 months or less prior to a bankruptcy filing for 565 companies from 2000–2008. Our findings indicate that while the proportion of going-concern modifications increases sharply in 2002–2003 compared to 2000–2001, it declines in the periods that follow, ultimately returning to its pre-Enron level.

Audit reporting for going concern in Spain during the global financial crisis

“…In addition, the existing studies are based on data from firms listed on the stock exchanges or on data contained in databases such as Compustat or CRSP (DeFond, Raghunandan, & Subramanyam, 2002;Feldmann & Read, 2010;Kaplan & Williams, 2012). These databases contain mostly listed firms, excluding smaller firms for their analysis, hence the importance of the need for future research to study unlisted firms.…”

“…There are currently very few studies, either in Spain (Mareque, López-Corrales, & De Lima, 2012;Mareque, López-Corrales, & Pedrosa, 2011) or in other countries (Carson, Simnett, & Tronnes, 2011;Cheffers, Whalen, & Sielis, 2011;Cheffers, Whalen, & Thrun, 2010;Feldmann & Read, 2010;Jiang, 2013 and that show the effect of the financial crisis on audit reports. A recent review by Carson et al (2012) provides a synthesis of the existing academic literature on the presentation of reports containing problems of continuity.…”

“…They investigate the proportion of firms in bankruptcy with prior going-concern qualified opinions in the pre-Enron and post-Enron periods. In general, the proportion of firms entering bankruptcy with prior going-concern qualified opinions in the post-Enron period increases to approximately 70% (Geiger & Raghunandan, 2001;Geiger, Raghunandan, & Rama, 2005;Feldmann & Read, 2010). Xu et al (2013) study the proportion of Australian firms that fail without first being alerted to the existence of going-concern situations during the period 2008-2009 (global financial crisis) compared with the period 2005-2007 (pre-global financial crisis).…”

The Causes and Economic Consequences of Patent Litigation

“…studies have found that since the Sarbanes-Oxley Act (SOX) of 2002, auditors have been more likely to issue goingconcern opinions (Fargher and Jiang, 2008;Li, 2009;Feldmann and Read, 2010) which have been shown to reduce the risk of litigation (Mong and Roebuck, 2005). 10,11 We thus suppose that auditors are more likely to assign unfavorable audit opinions for companies involved in patent litigation when their perceived risk is affected by litigation disclosures.…”

Audit Fee Research on Issues Related to Ethics

“…Li (2009) found that dependence at the firm level in the U.S. had no effect on going concern opinions before SOX; however, in 2003 dependence did make a difference. Later studies by Feldmann and Read (2010) and Kao, Li, and Zhang (2014) show that this change was only a temporary effect and that there is no effect in the longer term.…”