Going‐concern Uncertainties in Pre‐bankrupt Audit Reports: New Evidence Regarding Discretionary Accruals and Wording Ambiguity

Abstract

This paper extends the traditional view of audit failures related to the going-concern (GC) assumption to two circumstances scarcely analyzed in the audit literature: the earnings overstatement that characterizes firms without a going-concern uncertainty (GCU) in their audit reports and the wording used by auditors in the GC qualifications. We find significant differences between the discretionary accruals of Spanish GC and non-GC companies. After discounting their effect, the client's financial condition loses its significance in the multivariate explanation of the GCU and auditor size is the variable that better explains the qualifications. We also find that a large percentage of GCUs are written ambiguously and with an overuse of conditional language, but no client or auditor attributes significantly explain differences in the GCU wording. Our results support the need to strengthen the enforcement mechanisms, as a GC audit Standard is not, by itself, enough to efficiently control auditor behaviour.

Auditor Independence and Auditor Bargaining Power: Some Spanish Evidence Concerning Audit Error in the Going Concern Decision

“…There are few pressures on the auditor from institutions, society or the stock market, there is no obligatory auditor rotation and negligible risk of litigation. Hardly any lawsuits have been brought against auditors (Ruiz‐Barbadillo, Humphrey & García Benau, ; Ruiz‐Barbadillo et al ., ; Arnedo et al ., , ; Ruiz‐Barbadillo, Gomez‐Aguilar & Carrera, ). Writing in 2000, Ruiz‐Barbadillo et al .…”

“…Instead, the banking sector is more important, and capital markets play a secondary role (De Miguel et al, 2004;Sanchez-Ballesta & Garcia-Meca, 2005). As economic agents are able to use alternative sources on which to base their decisions, they do not demand a high quality of accounting information (Burgstahler, Hail & Leuz, 2006;Arnedo et al, 2008b).…”

“…There are few pressures on the auditor from institutions, society or the stock market, there is no obligatory auditor rotation and negligible risk of litigation. Hardly any lawsuits have been brought against auditors (Ruiz-Barbadillo, Humphrey & García Benau, 2000;Ruiz-Barbadillo et al, 2004;Arnedo et al, 2008aArnedo et al, , 2008bRuiz-Barbadillo, Gomez-Aguilar & Carrera, 2009). Writing in 2000, Ruiz-Barbadillo et al remark: 'Unlike in other countries, where audit firms have paid out huge court (and out-of-court) settlements, to date, only once has a Big five audit firm been required by a court of law to pay damages to any third party (and this decision is under appeal)'.…”

Determinación del riesgo de fracaso financiero mediante la utilización de modelos paramétricos, de inteligencia artificial, y de información de auditoría

“…De otra parte, un número anormalmente elevado de empresas fallidas recibieron salvedades, e incluso informes limpios (Venuti, 2004;Arnedo et al, 2008). Las salvedades o calificaciones en terminología sajona pueden ser de muy diferente naturaleza -dudas menores, dificultades para obtener algunos documentos o información, y graves acontecimientos que puedan amenazar la supervivencia empresarial-, lo que degrada la calidad de la información de auditoría.…”

Bankruptcy Prediction Models in Galician companies. Application of Parametric Methodologies and Artificial Intelligence

“…Some authors have reported that companies with qualified opinion experience more, and more intense, episodes of financial distress (Wilkins, 1997). But also, an abnormally high number of failed companies received qualified opinions, and even clean reports (Venuti, 2004;Arnedo et al, 2008). Qualifications can also be very different in nature -minor uncertainties, difficulties to gather some documents or information and severe events that can threaten company's survival -, and this degrades auditor's reporting quality.…”