An Investigation of Recent Changes in Going Concern Reporting Decisions Among Big N and Non-Big N Auditors
32 Pages Posted: 9 Jan 2008 Last revised: 2 Apr 2013
Date Written: January 1, 2013
Corporate accounting failures and regulatory proceedings that led to the enactment of the Sarbanes-Oxley Act of 2002 (SOX) increased the scrutiny of auditors. We investigate whether these events resulted in a change in auditor behavior with respect to going concern reporting. Generally speaking, we find that non-Big N auditors became more conservative while Big N auditors became more accurate. Specifically, non-Big N auditors issued more going concern opinions to both failing and non-failing clients post-2001, reducing their Type II misclassifications at the expense of increased Type I misclassifications. However, Big N auditors decreased their Type I misclassifications with no corresponding increase in Type II misclassifications. Thus, our findings suggest that increased auditor scrutiny resulted in performance improvements in the area of going concern reporting primarily for larger auditors. For smaller auditors, improved going concern accuracy for subsequently bankrupt clients came at the cost of more going concern opinions being issued to subsequently non-failing clients.
Keywords: going concern audit opinions, Type I and Type II misclassifications, auditor conservatism, auditor type, Big N auditors
JEL Classification: M49, G18, G33, G34, G38, M42, M48
Suggested Citation: Suggested Citation