Auditor Size and Going Concern Reporting
54 Pages Posted: 8 Dec 2015 Last revised: 4 Oct 2016
Date Written: October 3, 2016
Auditing theory predicts that larger auditors will be more likely to issue a going concern opinion to a distressed client. However, the existing empirical evidence on this issue is mixed. We argue that the mixed results of prior literature are attributable to a failure to adequately control for clients’ financial health. We demonstrate how properly controlling for clients’ financial health reveals a positive relationship between auditor size and the propensity to issue going concern opinions. We corroborate our finding by replicating a related study and showing how the results change when financial health variables are added to the model. In supplemental analysis, we find that Big 4 auditors are more likely than midtier auditors (Grant Thornton and BDO Seidman) to issue going concern opinions to distressed clients. We also find that, compared to other auditors, the Big 4 are less likely to issue false positive (type I error) going concern opinions. Our results are robust to using a variety of matching techniques.
Keywords: Audit Quality, Big 4, Going Concern, Auditor Independence
JEL Classification: M41, M42
Suggested Citation: Suggested Citation