The Impact of Religion on the Going Concern Reporting Decisions of Local Audit Practice Offices

Abstract:     
We extend research on the effects of local audit practice office characteristics on audit quality by investigating whether audit offices in highly religious U.S. Metropolitan Statistical Areas (MSAs) exhibit going concern decisions that are systematically different from audit offices in less religious MSAs. Prior research links religiosity to risk aversion and suggests audit practice offices in more religious MSAs could be more likely to resist client pressure to withhold going concern opinions because of aversion to litigation risk. However, prior research also indicates that religion is an important element of social identity; therefore, audit offices in more religious areas may be more likely to acquiesce to a client-preferred position if religion creates social connections between auditors and their clients or helps auditors better identify with their clients. Our results indicate that audit practice offices located in highly religious MSAs are more likely to issue going concern audit opinions. Additional tests suggest that the impact of religiosity on auditors’ going concern decisions is concentrated among non-Big 4 auditors. In addition, we find that audit practice offices in highly religious MSAs issue going concern reports with greater bankruptcy prediction accuracy.

Number of Pages in PDF File: 45

Keywords: going concern opinions, audit quality, religion, social identity

JEL Classification: M41, M42, Z12

working papers series