The Effect of Auditors’ Responses to Management’s Going Concern Evaluation on Auditors’ Going Concern Reporting Judgments

Abstract

The public and policymakers are interested in ways to reduce auditors’ reluctance to issue going concern opinions on financially distressed companies. In an experiment using a task with going concern risk, developed from a real-life bankruptcy where a going concern opinion was not issued by the auditor, experienced auditors make a preliminary going concern judgment after examining management’s quarterly going concern evaluation. Auditors then make a year-end going concern judgment. Findings indicate that auditors’ communicating informally to client management, and/or documenting in the workpapers their preliminary going concern judgment, increases the year-end likelihood of their issuing a going concern opinion in different, theory-consistent ways. Our results show the potential effects of auditors’ conveying responses to management’s evaluation on their likelihood of issuing a going concern opinion and can guide audit firms and policymakers on best practices.

Keywords: going concern, auditor reporting, standard-setting, FASB ASC 205-40

JEL Classification: M40, M42