Government Contracting and the Continuation as a Going Concern
47 Pages Posted: 2 Feb 2014 Last revised: 20 Mar 2015
Date Written: Febrary 28, 2015
When there is separation between a firm’s managers and owners, there is a greater need for information about the firm’s ability to continue as a going concern as a violation of such implies shareholders are at risk of losing their equity in the firm. The going concern assumption is a fundamental concept of financial reporting because, when violated, financial statements are required to be prepared at liquidation values. We examine the public signals of going concern audit opinions, delisting decisions, and filing for bankruptcy to draw inferences on whether firms that are dependent on the government for revenue are more likely to continue as going concerns. We find that firms that earn more revenues from the government are less likely to receive going concern opinions, delist from a major stock exchange, or file for bankruptcy. We also find that the loss of government contracts in the subsequent year affects auditors’ assessment of going concern risk in the current year, but the likelihood of delisting or filing bankruptcy is not affected, suggesting managers do not signal changes in going concern risk induced by the loss of government contracts. We document that the market reacts more negatively to government contracting firms’ going concern opinions and delisting decisions relative to firms that do not earn revenue from the government. Our findings suggest that firms’ dependence on the government as a customer is important for managers to consider in adhering to new U.S. GAAP disclosure requirements addressing their firms’ continuation as a going concern.
Keywords: Going concern; Audit opinion; Delisting; Bankruptcy; Government contracting
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