The Estimated Propensity to Issue Going Concern Audit Reports and Audit Quality

Journal of Accounting, Auditing and Finance DOI link: https://doi.org/10.1177/0148558X221079011

70 Pages Posted: 8 Jan 2013 Last revised: 9 May 2022

See all articles by Ling Chu

Ling Chu

Wilfrid Laurier University

Hila Fogel-Yaari

University of Texas at Arlington - Department of Accounting

Ping Zhang

University of Toronto - Rotman School of Management

Date Written: January 2022

Abstract

Auditors’ propensity to issue Going Concern Audit Reports (GCARs) is one of the proxies often used for audit quality. Although this propensity is a distinguishing characteristic of auditors, it does not indicate quality according to both theory and practice. In theory, higher-quality auditors make fewer audit errors; they are more likely to issue GCARs to clients that deserve them and less likely to issue GCARs to clients that do not. Therefore, the propensity itself does not indicate quality. In practice, Public Company Accounting Oversight Board (PCAOB) inspection reports reveal that the GCAR is rarely mentioned as a deficiency, and in the few cases in which it is discussed, the deficiency is attributed to evidence gathering and estimations, rather than to the GCAR decision itself. This study investigates the empirical ability of the GCAR propensity to proxy for audit quality and finds that different samples and different models yield different determinations of auditor quality. Our findings caution against the use of the propensity to issue GCARs as a proxy for audit quality.

Keywords: auditor, audit quality, auditor quality, going concern opinion

JEL Classification: M41, M42, L15, G33

Suggested Citation

Chu, Ling and Fogel-Yaari, Hila and Zhang, Ping, The Estimated Propensity to Issue Going Concern Audit Reports and Audit Quality (January 2022). Journal of Accounting, Auditing and Finance DOI link: https://doi.org/10.1177/0148558X221079011, Available at SSRN: https://ssrn.com/abstract=2197781 or http://dx.doi.org/10.2139/ssrn.2197781

Ling Chu

Wilfrid Laurier University ( email )

75 University Ave W
Waterloo, Ontario N2L 3C5
Canada

Hila Fogel-Yaari (Contact Author)

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

Ping Zhang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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