Auditor Size and Going Concern Reporting

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 demon...

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Bibliographic Details
Published in:Auditing : a journal of practice and theory 2018-05, Vol.37 (2), p.1-25
Main Authors: Berglund, Nathan R., Eshleman, John Daniel, Guo, Peng
Format: Article
Language:English
Subjects:
Auditing
Auditors
Bankruptcy
Going concerns
Studies
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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.
ISSN:0278-0380
1558-7991
DOI:10.2308/ajpt-51786