Going concern modifications and related disclosures in the Italian stock market: do regulatory improvements help investors in capturing financial distress?

Abstract

This paper investigates the investor reaction to audit reports containing a going concern modification (GCM) in the Italian market following new amendments regarding auditing regulations and public financial information disclosures. We applied the event study (ES) methodology to short event windows considering Italian listed companies during the period 2009–2015. Our findings partially contradict previous studies revealing a systematic negative impact of GCMs, especially when a GCM is attached to unqualified opinions. We clearly observe that Italian auditors have a strong higher propensity to issue a GCM than to express a qualification. Moreover, we find other interesting results that contradict the mainstream literature, detecting a stronger negative reaction in the case of recurring GCMs and when the modification is issued by non-Big 4 auditing firms. These differences could be explained considering the environmental characteristics of the Italian market such as the ownership structure, governance mechanisms and accounting culture, where minority investors act against ownership in accordance with the type II agency problem. Our empirical results suggest that the domestic and international regulatory amendments during the study period have increased the value relevance of GCMs and the usefulness of financial disclosures. This study might be of interest to practitioners and regulators in regard to contributing to the introduction of further regulatory interventions that will enhance both the informativeness of audit reports and awareness of investors in regard to going concern uncertainty.

Audit quality and debt restructuring: evidence from Italy

“…The significant association between Age and Success (Column 1) not only confirms the evidence of Kim and Kim (1999) but is also in line with the results of Åstebro and Winter (2012), who demonstrate that age is positively and significantly associated with the probability that a distressed company exits financial distress. Column 1 shows that the coefficient of GC is positive and significant at the 5% level, indicating that audit opinions without going concern modifications are associated with a higher probability of confirmation, in line with the findings of Brunelli et al (2021). Moreover, the coefficient of NI_growth , as reported in Column 1, is negative and slightly significant.…”

“…We consider the annual change in net income as a control variable ( NI_growth ) to account for the loss of profitability, and we include the presence of Big4 auditors ( Big4 ) to measure the potential Big N effect. Brunelli et al (2021) demonstrated that investors react negatively to unqualified and qualified audit opinions with going concern modifications. According to the revised ISA 570, if the financial statements provide sufficient information regarding the auditee’s ability to continue as a going concern, auditors must express their doubts in the emphasis of matter paragraph.…”

The mediating effect of going concern and corporate reporting in the relationship between corporate governance and investor confidence in financial institutions

“…The outcome indicates that going concern does not mediate the relationship between financial reporting and investor confidence. This result contradicts Brunelli, Carlino [ 28 ] and Mohamed, Allini [ 29 ], who discovered that going concern has a mediating effect.…”

“…Brunelli, Carlino [ 28 ] conducted research in the Italian market to determine how investors react to audit reports that contain a going concern modification. This research made use of a technique known as event study in order to investigate the brief event windows experienced by Italian-listed firms between the years 2009 and 2015.…”

The Effect of Debt Default, Audit Lag, Profitability, and Financial Distress on Going Concern Audit Opinion with Firm Size as a Moderating Variable in Mining Companies Listed on the Indonesia Stock Exchange 2016-2020

“…Financial distress is an event of a continuous decline in the company's financial performance within a particular time (Brunelli et al, 2021). For companies, financial distress is one of the conditions that cause bankruptcy.…”