Explaining auditors’ propensity to issue going‐concern opinions in Australia after the global financial crisis

Abstract

We document an increase in auditors issuing going-concern opinions in Australia over a prolonged period since the Global Financial Crisis that is not fully explained by changes in client risk. Overall, our evidence is consistent with auditors reporting more conservatively with the increased level of scrutiny from Australian Securities and Investments Commission inspections and other increased regulation, and in particular, the negative attention following the 2011-2012 inspections. As a result, auditor reports with reference to goingconcern issues have become less informative regarding future corporate failure.

Regulatory sanction risk and going-concern reporting practices: evidence for privately held firms

“…Auditors have incentives not to include language in the audit report that may negatively impact the relationship with a client, such as a going-concern opinion (Carson et al 2019). For example, it has been argued that a going-concern opinion may become a self-fulfilling prophecy (e.g.…”

“…attempts have been made to understand how regulatory sanction risk influences reporting behaviour. Important exceptions are Carson et al (2019) who identify changes in going-concern reporting in Australia under increased regulatory scrutiny and DeFond et al (2018) who conclude that non-Big 4 audit offices in the US are more likely to issue a first-time going-concern opinion when they have a greater awareness of SEC enforcement actions. Furthermore, Firth et al (2014) examined whether sanctioned auditors in China change their going-concern reporting practices in the post-sanctioned period and find support for more conservative reporting after the sanction for the sample of risky clients.…”

Anticipation and reaction to going‐concern modified audit opinions by sophisticated investors

“…External auditors obtain a vast amount of private information when conducting the audit (Beattie, Fearnley, & Brandt, ; Kida, ), most of which is never revealed to the public. However, in the case of a GCMO, the auditor is required to indicate their overall doubt regarding the continued viability of the company, along with the salient factors that have caused them to maintain such doubt (Auditing and Assurance Standards Board [AUASB], ; Blay & Geiger, ; Carson, Fargher, & Zhang, ; Carson, Ferguson, & Simnett, ; Public Company Accounting Oversight Board [PCAOB], ; Xu, Carson, Fargher, & Jiang, ). Professional standards indicate that a GCMO is not a prediction of failure.…”

“…Professional standards indicate that a GCMO is not a prediction of failure. Nonetheless, it is a credible signal from the auditor regarding the financial condition of the company and the auditor's professional assessment of continued future viability that has the potential to provide price‐relevant information to the market (Blay, Geiger, & North, ; Carson et al, ; Fleak & Wilson, ; Ianniello & Galloppo, ; Menon & Williams, ; Renart & Barnes, ). Therefore, we examine trading around announcements of first‐time GCMOs to determine whether institutional investors in the US appear to anticipate this GCMO, and whether it provides additional information to these investors.…”

“…Frino, Jones, Lepone, and Wong () and Ramalingegowda () examined trading on bankrupt firms in Australia and in the US, and Ramalingegowda () noted that there are numerous studies on the trading behavior of institutional investors, yet there is little research that investigates institutional investor trading on financially distressed firms. As investor trading and auditor reporting on distressed firms is of interest to regulators, practitioners, and academics (Carson et al, ; Kausar & Lennox, ), we extend the literature in this area by examining trading surrounding distressed firms that receive first‐time GCMOs.…”