The Estimated Propensity to Issue Going Concern Audit Reports and Audit Quality
Journal of Accounting, Auditing and Finance DOI link: https://doi.org/10.1177/0148558X221079011
70 Pages Posted: 8 Jan 2013 Last revised: 9 May 2022
Date Written: January 2022
Abstract
Auditors’ propensity to issue Going Concern Audit Reports (GCARs) is one of the proxies often used for audit quality. Although this propensity is a distinguishing characteristic of auditors, it does not indicate quality according to both theory and practice. In theory, higher-quality auditors make fewer audit errors; they are more likely to issue GCARs to clients that deserve them and less likely to issue GCARs to clients that do not. Therefore, the propensity itself does not indicate quality. In practice, Public Company Accounting Oversight Board (PCAOB) inspection reports reveal that the GCAR is rarely mentioned as a deficiency, and in the few cases in which it is discussed, the deficiency is attributed to evidence gathering and estimations, rather than to the GCAR decision itself. This study investigates the empirical ability of the GCAR propensity to proxy for audit quality and finds that different samples and different models yield different determinations of auditor quality. Our findings caution against the use of the propensity to issue GCARs as a proxy for audit quality.
Keywords: auditor, audit quality, auditor quality, going concern opinion
JEL Classification: M41, M42, L15, G33
Suggested Citation: Suggested Citation