Audit Reports in Australia during the Global Financial Crisis

Abstract

The Global Financial Crisis reduced economic growth, impacted equity and credit markets, and increased business risk. To the extent that this increased risk translates into greater uncertainty of companies’ ability to continue as going concerns, this should be reflected in audit reports. This paper investigates how the crisis impacted auditor reporting in Australia by examining the period 2005–2009. It finds that the main reason for audit report modification is going concern and that modification rates increased from 12% in 2005–2007 to 18% in 2008 and 22% in 2009. Serious audit report qualification rates remain around 3%.

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

“…First, we add to prior research that indicates that auditors report more conservatively in response to 4 For example, there is evidence that auditors issued more going-concern modified audit reports after the high profile corporate collapses in 2001 and the subsequent increase in regulator and media attention in the United States (Willekens and Bauwhede, 2004;Geiger et al, 2005;Myers et al, 2014), in Australia (Xu et al, 2011(Xu et al, , 2013, and in Belgium (Carcello et al, 2009). First, we add to prior research that indicates that auditors report more conservatively in response to 4 For example, there is evidence that auditors issued more going-concern modified audit reports after the high profile corporate collapses in 2001 and the subsequent increase in regulator and media attention in the United States (Willekens and Bauwhede, 2004;Geiger et al, 2005;Myers et al, 2014), in Australia (Xu et al, 2011(Xu et al, , 2013, and in Belgium (Carcello et al, 2009).…”

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

“…In Australia, Carey et al (2008) find that the proportion of firms with going concern opinions that do not subsequently fail is 88% based on first-time going concern recipients from 1994-1997. Xu et al (2011) report similar rates for periods up to 2008 (global financial crisis). Knechel and Vanstraelen (2007) find that the proportion of firms with going concern opinions that do not subsequently fail is 87% for a sample of stressed private companies in Belgium during the period 1992-1996.…”

“…Therefore, the rate of bankruptcies without prior issue of a going concern uncertainty opinion does not seem to have decreased notably during the period of financial crisis. Xu et al (2011Xu et al ( , 2013 published two papers on firms listed on the Australian stock exchange. In the first, they make a descriptive study for a sample of 8382 firms, in order to examine the response by Australian auditors to the current world financial crisis.…”

“…The classification of audit firms in the existing literature is varied; authors such as Xu et al (2011Xu et al ( , 2013 or López-Corrales (1997) use a classification similar to the one used in this paper. Ruíz-Blanco and López-Corrales (Ruiz-Blanco & López-Corrales, 2003) or Mareque et al (2015) classify auditors into: multinational companies, national companies and individual auditors.…”

Do auditors make mistakes when they write audit reports? An empirical study applied to Spanish non-listed firms

“…But from the empirical evidence of the existing literature, (Ahadiat, 2011;Caso, García, López, & Martínez, 2003;Duréndez & Sánchez, 2008;Ruiz-Barbadillo, Gómez, & Carrera, 2006;Xu, Carson, Fargher, & Jiang, 2013;Xu, Jiang, Fargher, & Carson, 2011;Zdolsek & Jagric, 2011), auditors are somewhat reluctant to issue either of these last two opinions, and it can be appreciated that, in general, there is a tendency to classify reports into two major sections, favourable reports and qualified reports, including in the latter qualified, refused and unfavourable reports.…”