Do going concern opinions provide incremental information to predict corporate defaults?

Krupa, Jake; Minutti‐Meza, Miguel; Vulcheva, Maria

doi:10.1007/s11142-020-09544-x

Cited by 41 publications

(15 citation statements)

References 49 publications

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“…Next, Willenborg and McKeown (2001) document that GCOs have both information content and predictive content for initial public offerings. More recently, Gutierrez et al (2020) show that adding GCOs to a number of default models increases the models' predictive ability. It seems, therefore, that GCOs summarise a complex set of conditions not captured entirely by other predictors of default and could be a useful signal of high risk of default for some investors.…”

Section: Studies Of Departures From the Standard Unqualified Audit Reportmentioning

confidence: 99%

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The art of conversation: the expanded audit report

Minutti‐Meza

2021

Accounting and Business Research

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The new generation of expanded audit reports includes disclosures about significant matters in a company's financial reporting and its audit. These disclosures are a landmark change in auditors' responsibility to provide information to the public. I examine expanded reports in various jurisdictions, why they became mandatory, what the evidence from their implementation is, and whether they have fulfilled the expectations of regulators and other stakeholders. Expanded reports are intended to increase the information content and usefulness of audit opinions, to increase external monitoring of auditors and management, and to foster a more open conversation between auditors and users of financial reporting. However, existing regulatory requirements, conflicting auditors' incentives to provide new information, and evidence from the expanded reports' implementation call into question whether these objectives have been met. It is my hope that expanded reports are only a first step towards enhanced auditor reporting.

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Section: Studies Of Departures From the Standard Unqualified Audit Reportmentioning

confidence: 99%

“…In the first year after July 2017, the expanded reports of AIM companies typically included two or three KAMs and approximately 2,500 words, while the expanded reports of premium companies typically included one additional KAM and approximately 4,000 words. However, both types of companies have expanded reports of comparable length (Gutierrez et al 2020).…”

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confidence: 99%

The art of conversation: the expanded audit report

Minutti‐Meza

2021

Accounting and Business Research

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“…Thus, prior to the 10-K filing, officers and directors are aware not only of the contents of the audit report (i.e., the auditor's opinion) but also any detailed findings of the audit that are not conveyed in the report. In many cases-especially ones with adverse outcomes-this information is material (e.g., Ghicas et al 2008;Gutierrez et al 2018;Gutierrez et al 2020).…”

Section: Introductionmentioning

confidence: 99%

Audit process, private information, and insider trading

et al. 2022

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While the shareholder benefits of audits are well documented, evidence on whether audits can facilitate opportunistic behavior by corporate insiders is scarce. In this paper, we examine whether the audit process facilitates one particular form of opportunism: informed trading by corporate insiders. We focus our analysis on insider trading around the audit report date. We find an increase in trading around the audit report date and that the increase is abnormally large for firms that subsequently report modified opinions. The abnormal increase in trading is concentrated among officers and non-audit committee independent directors, and most pronounced in first-time modified opinions and modified opinions in years where financial results are subsequently restated. These trades are highly opportunistic: they predict restatements, and as a consequence, we show they avoid significant losses. Collectively, our findings provide novel evidence that insiders appear to exploit private information about the audit process––a process ostensibly designed to protect shareholders––for opportunistic gain.

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“…Although the advantage of statistical models in predicting bankruptcy is wellestablished, according to Gutierrez et al (2020), auditors presently do not use statistical models systematically as a diagnostic tool in making going-concern assessments. Instead, auditors typically rely on a checklist that includes various indicators of financial distress suggested by going-concern standards.…”

Section: Prediction Modelsmentioning

confidence: 99%

Decision Tree Tool for Auditors’ Going Concern Assessment in Spain

Custodio¹,

Gu²,

González³

2022

IJDAR

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The COVID-19 pandemic increased uncertainty about the financial future of many organizations, and regulators alerted auditors to be increasingly skeptical in assessing an entity’s ability to continue as a going concern. An auditor’s assessment of an entity’s ability to continue as a going concern is a matter of significant judgment. This paper proposes to use machine learning to construct a Decision Tree Automated Tool, based on both quantitative financial indicators (e.g., Z-scores) and qualitative factors (e.g., partners’ judgment and assessment of industry risk given the pandemic). Considering both quantitative and qualitative factors results in a model that provides additional audit evidence for auditors in their going-concern assessment. An auditing firm in Spain used the model as a supplemental guide, and the model’s suggested results were compared to auditors’ reports to evaluate its effectiveness and accuracy. The model’s predictions were significantly similar to the auditors’ assessments, indicating a high level of accuracy, and differences between the model’s proposed outcomes and auditors’ final conclusions were investigated. This paper also provides insights for regulators on both the use of machine-learning predictive models and additional factors to be considered in future going-concern assessment research.

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Do going concern opinions provide incremental information to predict corporate defaults?

Cited by 41 publications

References 49 publications

The art of conversation: the expanded audit report

The art of conversation: the expanded audit report

Audit process, private information, and insider trading

Decision Tree Tool for Auditors’ Going Concern Assessment in Spain

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