Is an Auditors’ Propensity to Issue Going Concern Opinions Related to Audit Quality?

38 Pages Posted: 8 Jan 2013

See all articles by Hila Fogel-Yaari

Hila Fogel-Yaari

Tulane University - A.B. Freeman School of Business

Ping Zhang

University of Toronto - Rotman School of Management

Date Written: January 2, 2013

Abstract

Auditors’ propensity to issue going concern (GC) opinions is commonly used as a proxy for the unobservable audit quality. In this paper we examine the validity of this proxy by empirically testing whether the propensity to issue GC opinions is indeed related to fewer audit errors. We start our analysis by categorizing auditors according to their propensity to issue GC opinions according to a GC regression model. We then test whether auditors, who have a relatively higher propensity to issue GC opinions, have lower audit opinion error rates. We obtain two main results. First, auditors’ propensity to issue GC opinions is not significantly associated with their Type II opinion error rates (a Type II error is a clean opinion for a firm that files for bankruptcy within one year of the audit opinion). Second, the auditors who issue relatively more GC opinions are more likely to make Type I errors, indicating that the additional GC opinions are being issued for the wrong companies (a Type I error is a GC opinion for a firm that does not file for bankruptcy within one year of the audit opinion). Our findings cast doubt on the link between the propensity to issue GC opinions and audit quality.

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

Suggested Citation

Fogel-Yaari, Hila and Zhang, Ping, Is an Auditors’ Propensity to Issue Going Concern Opinions Related to Audit Quality? (January 2, 2013). CAAA Annual Conference 2013. Available at SSRN: https://ssrn.com/abstract=2197781 or http://dx.doi.org/10.2139/ssrn.2197781

Hila Fogel-Yaari

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Ping Zhang (Contact Author)

University of Toronto - Rotman School of Management ( email )

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

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