Going Concern Opinions and Management's Forward Looking Disclosures: Evidence from the MD&A
48 Pages Posted: 23 Mar 2017 Last revised: 2 Jun 2018
Date Written: May 27, 2018
In this study I examine the relationship between the auditor’s going concern opinion and management’s forward-looking disclosures in the Management’s Discussion and Analysis (MD&A) section of 10-K filings. The analysis is two-fold and addresses whether the presence of a going concern opinion is associated with (1) the quantity of forward-looking disclosures and (2) the level of equivocation or lack of clarity of forward-looking disclosures. I examine MD&A disclosures from a sample of 2,365 financially distressed companies over the fiscal years 2010-2014 and find that while the absolute number of forward-looking disclosures is lower for companies receiving a going concern opinion, the proportion of forward-looking disclosures in the MD&A is greater in the presence of a going concern opinion. I also find that the forward-looking disclosures use less equivocation, and hence are clearer about future prospects when the company receives a going concern opinion. In addition, I find that forward-looking disclosures are significantly different for first-time versus continuing going concern opinions. In sum, my results suggest generally improved forward-looking disclosures in MD&A when companies receive a going concern opinion from their auditor.
Keywords: MD&A forward-looking disclosures, going concern, audit opinion, equivocation
JEL Classification: M41, M42
Suggested Citation: Suggested Citation