Going Concern Decisions and Auditor Switches: An Economic Perspective

44 Pages Posted: 28 May 2002

See all articles by Robert R. Tucker

Robert R. Tucker

Fordham University - Accounting Area

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems

Multiple version iconThere are 2 versions of this paper

Date Written: Undated

Abstract

This research examines the effects of economic incentives on the strategic interaction between an auditor and client when a potential going concern situation exists. This experimental economics investigation has the following game structure. The auditor first obtains information relevant in predicting the client's viability and then conveys to the client an intention to express a clean or going concern opinion. A client can switch auditors in an attempt to avoid a going concern opinion and the potential, self-fulfilling nature of the auditor's prediction of business termination. This incentive to switch auditors poses a credible threat to the incumbent auditor.

Conducting the test in the laboratory enables us to vary 1) the likelihood the successor auditor will issue a clean opinion and 2) the presence of the self-fulfilling prophecy effect. By varying the levels of these treatments, we are able to test the predicted effect on the audit partner's reporting decision and the client's switching decision.

The results strongly indicate that treatments 1) and 2) both had a significant effect on subject behavior. However, contrary to the equilibrium predictions, auditors did not sacrifice their independence as 1) and 2) increased. Clients, on the other hand, did respond opportunistically by switching auditors more frequently as 1) and 2) increased. The effect was strongly significant and was directionally consistent with the analytical predictions.

Keywords: auditing, going concern opinions, experimental economics, game theory

JEL Classification: M40, C70, C90

Suggested Citation

Tucker, Robert R. and Matsumura, Ella Mae, Going Concern Decisions and Auditor Switches: An Economic Perspective (Undated). Available at SSRN: https://ssrn.com/abstract=304379 or http://dx.doi.org/10.2139/ssrn.304379

Robert R. Tucker (Contact Author)

Fordham University - Accounting Area ( email )

Graduate School of Business
113 W. 60th Street
New York, NY 10023
United States
212-636-6121 (Phone)

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems ( email )

WI
United States

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