The Going Concern Opinion and the Adverse Credit Rating: An Analysis of Their Relationship

Abstract

This paper examines the relationship between going concern opinions issued by the Big 4 audit firms and adverse credit ratings from the two largest credit ratings agencies (CRAs), Standard & Poor’s (S&P) and Moody’s. The paper focuses on audit opinions and credit ratings of firms that later file for bankruptcy. The relationship is examined from both sides. We examine whether credit ratings inform auditors in the making of going-concern (GC) audit opinion decisions, and whether GC opinions have an impact on a firm’s credit ratings. The analysis is undertaken on a sample of firms that filed for bankruptcy between the 1 January 2002 and 31 December 2013 that also had an audit opinion signed during the 12 months before bankruptcy, along with a credit rating issued by either or both, S&P and Moody’s. The results show that the likelihood of an auditor issuing a GC opinion is related to the credit rating issued the month before by both S&P and Moody’s. Results also show that S&P reacted in the month after an auditor issued a GC opinion by downgrading its ratings 68% of the time. However, Moody’s did not react in the same way, downgrading their ratings only 24% of the time. This paper sheds light on the relationship between audit opinions and credit ratings in relation to distressed companies. This is useful to better understand the wider relationship between auditors and credit rating agencies, and to be able to consider the future of these services.

Keywords: auditing; audit firms; going concern opinions; credit ratings

JEL Classification: G29, G33, L11, M41