How Do Auditors Behave During Periods of Market Euphoria? The Case of Internet IPOs

33 Pages Posted: 26 Oct 2012

See all articles by Andrew J. Leone

Andrew J. Leone

University of Miami

Sarah C. Rice

Texas A&M University - Mays Business School

Joseph Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Michael Willenborg

University of Connecticut - Department of Accounting

Date Written: September 30, 2011

Abstract

How do auditors behave during periods of market euphoria? To address this question, we study auditor going-concern opinions around the time of the wave of stressed Internet companies filing to go public on Nasdaq, a period many characterize as the ‘dot com bubble’. We focus on the day the auditor signs the opinion that appears in a stressed, Internet registrants’ IPO filing and document a sharp increase in the number of opinions with dates between January 1999 and April 2000. Contemporaneous with this jump in transaction volume, and for the duration of these 16-months, Big 5 firms were less likely to render going-concern opinions to their stressed, Internet IPO registrant clients. Upon conducting tests for determinants that could lead auditors to shift their decision criteria during this euphoric audit market, we find the presence of a going-concern opinion varies with variables that proxy for client reasons (financial distress, company age, venture backing, IPO cash burn) and for less auditor independence/skepticism (recent fees for clients without venture backing and a rush-to-market for clients with venture backing) by the Big 5 firms. These findings suggest a mixed conclusion regarding the Big 5's behavior; as the presence of a going-concern opinion varies inversely with variables that proxy for both client viability and auditor self interest. As for consequences to investors, our analysis of two, three and four-year post-IPO stock delisting provides some evidence of a decrease in the predictive content (early-warning value) of Big 5 opinions signed during the Internet IPO bubble.

Suggested Citation

Leone, Andrew J. and Rice, Sarah C. and Weber, Joseph Peter and Willenborg, Michael, How Do Auditors Behave During Periods of Market Euphoria? The Case of Internet IPOs (September 30, 2011). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2166243

Andrew J. Leone

University of Miami ( email )

School of Business
Coral Gables, FL 33146
United States
305-284-3101 (Phone)

HOME PAGE: http://sbaleone.bus.miami.edu

Sarah C. Rice

Texas A&M University - Mays Business School ( email )

Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States

Joseph Peter Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-4310 (Phone)

Michael Willenborg (Contact Author)

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269
United States
860-486-3020 (Phone)
860-486-4838 (Fax)

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