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Are going‐concern issues disclosed in audit reports associated with subsequent bankruptcy? Evidence from the United States
Author(s) -
Desai Vikram,
Desai Renu,
Kim Joung W.,
Raghunandan Kannan
Publication year - 2020
Publication title -
international journal of auditing
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.583
H-Index - 21
eISSN - 1099-1123
pISSN - 1090-6738
DOI - 10.1111/ijau.12183
Subject(s) - business , accounting , bankruptcy , solvency , audit , profitability index , market liquidity , going concern , auditor's report , financial statement , sample (material) , actuarial science , finance , chemistry , chromatography
The Public Company Accounting Oversight Board (PCAOB) has expressed interest in the following issues related to going‐concern modified audit opinions (GCOs): auditor's communication of factors that led to the GCO, the role of liquidity versus other factors in GCOs, and the subsequent failures of clients with GCOs. We use a sample of 2,921 first‐time GCOs spanning the years 1999 to 2015 in the United States and find that profitability factors are cited in 81% of GCOs while liquidity issues are cited in 56% of GCOs. Overall, 16.8% of the first‐time GCO clients entered bankruptcy within one year. After controlling for the probability of bankruptcy, client size, and auditor type, for clients of Big N auditors, the disclosure of profitability factors in the GCO is associated with a higher likelihood of subsequent bankruptcy; in contrast, for clients of non–Big N auditors, disclosures of liquidity and solvency problems are associated with a higher likelihood of subsequent bankruptcy. Our findings provide an empirical grounding for the debates surrounding GCOs and provide useful information for standard‐setters and financial statement users.