Federal Judge Ideology and the Going Concern Reporting Incentives of Big 4 and Non-Big 4 Auditors

58 Pages Posted: 23 Aug 2018 Last revised: 23 Mar 2021

See all articles by Tracy Gu

Tracy Gu

The University of Hong Kong (HKU), Accounting Division, Faculty of Business and Economics

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business

Date Written: August 9, 2018

Abstract

We analyze how variation in federal level legal liability associated with judge ideology is associated with the likelihood of firms receiving going-concern modified audit opinions, separately for Big Four and non-Big Four clients. With auditors trading off between Type I and Type II reporting errors, the threshold value (of client bankruptcy probability) above which auditors issue going-concern reports is decreasing and convex in the level of federal litigation risk. Building on literature showing that federal judge ideology affects the likelihood and outcome of lawsuits, we find that Big Four and non-Big Four auditors converge in their going-concern reporting decisions as federal litigation risk increases and that this convergence is caused by the greater effect of judge ideology on non-Big Four than on Big Four auditors. The key results remain with firm-fixed effects and are not driven by the effects of judge ideology on auditor choice or bankruptcy probability.

Keywords: Federal Judge Ideology, Federal Litigation Risk, Going Concern Modified Audit Opinions, Big 4 and Non-Big 4

JEL Classification: G39, M40, M42

Suggested Citation

Gu, Tracy (Ti) and Hui, Kai Wai and Simunic, Dan A., Federal Judge Ideology and the Going Concern Reporting Incentives of Big 4 and Non-Big 4 Auditors (August 9, 2018). Available at SSRN: https://ssrn.com/abstract=3229115 or http://dx.doi.org/10.2139/ssrn.3229115

Tracy (Ti) Gu (Contact Author)

The University of Hong Kong (HKU), Accounting Division, Faculty of Business and Economics ( email )

#1312, KK Leung Building
Pokfulam Road
Hong Kong
+852 3917-8345 (Phone)

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting ( email )

Pokfulam Road
Hong Kong, Pokfulam
Hong Kong

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
416-486-5361 (Phone)
416-486-6158 (Fax)

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