An Experimental Investigation of Alternative Going-Concern Reporting Formats: A Canadian Experience

Abstract:     
This study questioned whether the current or proposed Canadian standard of disclosing a going-concern contingency is viewed as equivalent to the standard adopted in the U.S by financial statement users. We examined loan officers' perceptions across three different formats, namely, integrated note with a clean auditor's report (current Canadian standard), a stand-alone note with referencing on the face of the Balance sheet and Income statement (proposed and now rescinded standard), and a modified auditor's report with an explanatory paragraph in addition to a stand-alone going concern note (standard adopted in the U.S and others). Bank loan officers were selected as the appropriate financial statement users for this study. The results of the test of hypotheses suggest that once the going-concern note is fully disclosed in the notes, the style of presentation within the notes (stand-alone note versus an integrated note) does not significantly influence the reactions and perceptions of risk if the auditor's report is unmodified (i.e., no reference made to a going concern contingency). However, when the auditor's report is modified with an explanatory paragraph detailing the uncertainty and referencing the going-concern note in the footnotes, the format appeared to convey a stronger signal of financial distress to loan officers. These results appear to differ from prior research, which holds that once the information is released in the financial statements, the format has no additional effect. The finding of this study is two-fold. Firstly, that the proposed and withdrawn Canadian standard was not perceived differently by the bankers from the present Canadian standard, but the standard adopted in the U.S and most other countries was. This makes a strong argument for moving all the way to that standard as opposed to the "halfway" approach of the now rescinded CICA exposure draft. Thus, the public interest in Canada may not be served by adopting a halfway approach.

Keywords: auditor's report, going concern, financial distress, standard setting

JEL Classification: M41, M45, M49, G33

Accepted Paper Series