Strategic Auditor Behavior and Going-Concern Decisions

Abstract

This paper analyzes a game theoretic model in which a client can potentially avoid a going concern opinion and its self fulfilling prophecy by switching auditors. Incumbent auditors are less willing to express a going concern opinion the more credible the client's threat of dismissal and the stronger the self fulfilling prophecy effect. Similarly, the client is more willing to switch auditors the more likely it is that auditors' reporting judgments will differ and the stronger the self fulfilling prophecy effect. Further, with greater noise in the auditor's forecast of client viability, the auditor tends to express fewer going concern opinions.

Keywords: auditing, game theory, opinion shopping, going-concern

JEL Classification: M40, M49, C70