Auditor economic incentives and going-concern opinions in a limited litigious Continental European business environment: empirical evidence from Belgium

Abstract

Abstract-Theory predicts that auditor reporting behaviour may be influenced by the perceived consequences of disclosing going-concern uncertainty in the audit report (DeAngelo 1981, Watts andZimmerman 1986). Krishnan and Krishnan (1996) and Louwers (1998) have addressed this issue empirically in a US context. The results of Krishnan and Krishnan (1996) suggested that one of the important factors in the auditor's opinion decision is the risk of litigation. The purpose of this study is to examine the relationship between auditor economic incentives and the propensity to issue going-concern opinions in a limited litigious business environment, Belgium. In spite of the low risk of litigation and the fact that most Belgian companies are privately held, various regulations have been put into effect to safeguard audit quality in Belgium. However, the results suggest that the auditor's going-concern opinion decision in Belgium is associated with factors relating to the perceived consequences of disclosing a goingconcern opinion. Specifically, the results suggest that auditors in Belgium are significantly less likely to issue going-concern opinions to clients that pay higher audit fees, and when the audit firm has lost a relatively high proportion of its clients in the preceding year. The auditor's going-concern opinion does not appear to be significantly influenced by the length of the auditor-client relationship, year of the auditor engagement period, and auditor type.

Audit tenure and audit Qualifications in a low litigation risk setting: An analysis of the Spanish market

“…A similar conclusion was reached by Vanstraelen (2002) who investigated the Belgian audit market. Nevertheless, Vanstraelen's (2002) methodological approach was different from the former, because its sample was formed by bankrupt companies, financially stressed non-bankrupt companies and financially non-stressed non-bankrupt companies, all three categories with the same weight. Geiger and Raghunadan (2002) defined audit reporting failures as the inability of the auditor to issue a going-concern opinion to a company entering bankruptcy.…”

“…Does a "honeymoon period" exist in the Spanish market? Levinthal and Fichman (1988) and Vanstraelen (2002) observed that the likelihood of qualified opinions increased just after the first years of engagement. The former authors named this effect a honeymoon period in the auditor-client relationship.…”

“…Previous research has addressed the relationship between audit tenure and the nature of the audit report by focusing on audit qualifications for reasons of going concern and analyzing financially distressed companies [Menon and Schwartz, 1985;Carcello and Neal, 2000;Vanstraelen, 2000;Vanstraelen, 2002;Ruiz-Barbadillo et al, 2004;Carey and Simnett, 2006;Knechel and Vanstraelen, 2007;Lim and Tan, 2010;Gul et al, 2011]. Such approach faces some advantages and disadvantages.…”

Audit firm tenure and audit qualifications in Spain: a multinomial approach

“…Louwers (1998) and Carcello and Neal (2000), with samples of US financially distressed firms, did not find a negative effect of tenure on the auditors' reporting decision. A similar conclusion was reached by Vanstraelen (2002) and Knechel and Vanstraelen (2007) for the Belgian market, and by Ruiz-Barbadillo et al (2004) and for the Spanish market. This evidence supports that the litigation risk faced by the auditor when an unqualified report is issued to a company which deserves an audit report with GCMO would offset the 'familiarity threat' associated to long tenures with the audit firm.…”

Possible Impact of the Latest International Standard of Auditing 570 on the Rate of Going Concern Opinion Issuance in Malaysia

“…For instance, in auditing standard there should be a clear and objective indicator like when Altman z-score of a client is -1 or less, it is compulsory for an auditor to issue GC opinion. Previous researchers suggested that a more objective auditing standard (which can cause less auditor discretion) could lead to a more accurate GC opinion issuance (Vanstraelen, 2000(Vanstraelen, , 2002(Vanstraelen, , 2003.…”