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Are Auditors' Going-Concern Evaluations More Useful after SOX?

Journal of Ethics and Public Policy, Vol. 13, No. 1, 2012

19 Pages Posted: 18 Mar 2012  

Benjamin P. Foster

University of Louisville - College of Business and Public Administration

Terry J. Ward

Middle Tennessee State University

Date Written: March 17, 2012

Abstract

Bankruptcy risk is a crucial factor in auditors’ decisions whether or not to modify their audit opinion based on the going-concern assumption. SOX required more extensive audit procedures than those required before its passage. More extensive audit procedures should result in more meaningful audit reports. This study examines whether the auditors’ going-concern opinion provides more useful incremental information after SOX than before SOX in distinguishing between distressed companies that become bankrupt in the next year and those that do not. We find that an audit opinion variable adds more useful information to bankruptcy prediction models after SOX than before SOX. Our findings provide evidence that financial statement users have derived benefits from the costly procedures required under SOX.

Keywords: Sarbanes-Oxley Act, SOX, going concern modifications, bankruptcy, pre-SOX, post-SOX

JEL Classification: H5, M4

Suggested Citation

Foster, Benjamin P. and Ward, Terry J., Are Auditors' Going-Concern Evaluations More Useful after SOX? (March 17, 2012). Journal of Ethics and Public Policy, Vol. 13, No. 1, 2012. Available at SSRN: https://ssrn.com/abstract=2025280

Benjamin Foster (Contact Author)

University of Louisville - College of Business and Public Administration ( email )

School of Accountancy
Louisville, KY 40292
United States
502-852-4826 (Phone)
502-852-6070 (Fax)

Terry Ward

Middle Tennessee State University ( email )

P.O. Box 50
Murfreesboro, TN 37132
United States
615-898-2341 (Phone)
615-898-5045 (Fax)

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