Costs Associated With Going‐Concern‐Modified Audit Opinions: An Analysis of the Australian Audit Market

Abstract

This article examines the potential costs to Australian auditors and their clients from the issuance of first‐time going‐concern‐modified audit opinions. We examine the population of Australian companies receiving a first‐time going‐concern‐modified audit opinion during the period 1994–97 and a matched sample of financially distressed firms receiving a clean audit opinion. Results indicate that auditor switching is positively associated with receipt of a going‐concern‐modified opinion. However, we find no empirical evidence that there is a self‐fulfilling prophecy of increased probability of company failure following the issuance of a going‐concern‐modified opinion for the Australian companies in our study. Our analyses of lost audit fees indicate that auditors issuing first‐time going‐concern‐modified audit opinions lost proportionately more fees by losing clients (through switching or company failure) than firms not issuing a going‐concern‐modified opinion to financially stressed clients.

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

“…This discovery has been documented in studies on auditor switching in the United Kingdom (Craswell, 1988;Lennox, 2000), Australia (Carey, Geiger, & O'Connell, 2008), China (Chan, Lin, & Mo, 2006), Belgium (Vanstraelen, 2003) and the US (Carcello & Neal, 2003;Chow & Rice, 1982;Geiger, Raghunandan, & Rama, 1998;Smith, 1986). This offers strong empirical support to the idea that auditor dismissal poses a potential economic threat when the auditor is considering a modified report on a going concern basis.…”

“…Some studies examine the relationship between the opinion in the report and the client firm's decision to sack the auditor. The majority of studies at international level found that auditors are more likely to be dismissed a year after issuing a report with an opinion modified by going-concern concerns (Carcello & Neal, 2003;Carey et al, 2008;Chow & Rice, 1982;Craswell, 1988;Geiger et al, 1998;Lennox, 2000;Smith, 1986;Vanstraelen, 2003).…”

“…In the UK, the proportion of firms that do not fail in the year subsequent to a going concern opinion is approximately 76-80% (Citron & Taffler, 1992;Lennox, 1999). 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).…”

Las expectativas del usuario ante la salvedad al principio de empresa en funcionamiento. Evidencia empírica del fenómeno de la profecía autocumplida para el caso español

“…Este control ha sido implementado en estudios posteriores que proporcionan la evidencia más robusta de la que se dispone. Sin embargo, mientras que Pryor y Terza (2002), Vanstraelen (2003), Gaeremynck y Willekens (2003) encuentran resultados favorables, Carey et al (2008) concluyen que no existen indicios para pensar en la existencia de un efecto profecía.…”

“…Así, mientras algunos de ellos aportan evidencia consistente con el mismo (Pryor y Terza, 2002;Vanstraelen, 2003;Gaeremynck y Willekens, 2003), otros no encuentran asociación alguna entre tipo de opinión y probabilidad de quiebra (Citron y Taffl er, 1992Carey et al, 2008), llevando a argumentar que este fenómeno es más un mito que una realidad. La evidencia contradictoria unida a la difi cultad metodológica que supone contrastar empíricamente si la opinión actúa como una profecía que tiende a realizarse hace que existan todavía aspectos que deben ser sometidos a investigación.…”