The Loss of Information Associated with Binary Audit Reports: Evidence from Auditors' Internal Control and Going Concern Opinions

Posted: 3 Dec 2018

See all articles by Brant E. Christensen

Brant E. Christensen

University of Oklahoma

Stevanie S. Neuman

University of Missouri at Columbia - School of Accountancy

Sarah C. Rice

Texas A&M University - Mays Business School

Multiple version iconThere are 2 versions of this paper

Date Written: August 24, 2018

Abstract

This study provides evidence that binary signals in audit reports are unable to fully communicate underlying risks that are inherently continuous in nature. Specifically, we find that companies whose audit reports signal an improvement in internal control effectiveness relative to the prior year are still more likely to subsequently restate the current year’s financial statements than companies with no material weaknesses in either year. Similarly, companies deemed to no longer have substantial doubt of continuing as a going concern are still more likely to declare bankruptcy than companies with no going concern opinion in either year. Results in both settings suggest the presence of residual risk that cannot be communicated through a binary audit report, despite the fact that auditors recognize the risk, as evidenced by higher audit fees and longer audit report lags. Our findings are strongest when the reported improvement is more pronounced, and our results hold in matched samples. Our study provides empirical evidence that supports recent regulatory efforts to improve the content of the audit report and offers suggestions for future research.

Keywords: audit report, critical audit matters, material weakness remediation, restatements, internal control weaknesses, going concern opinions, bankruptcy

JEL Classification: G10, M41, M42, M48

Suggested Citation

Christensen, Brant E. and Neuman, Stevanie S. and Rice, Sarah C., The Loss of Information Associated with Binary Audit Reports: Evidence from Auditors' Internal Control and Going Concern Opinions (August 24, 2018). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3290783

Brant E. Christensen (Contact Author)

University of Oklahoma ( email )

Norman, OK 73019-4004
United States

Stevanie S. Neuman

University of Missouri at Columbia - School of Accountancy ( email )

College of Business
Columbia, MO 65211
United States

Sarah C. Rice

Texas A&M University - Mays Business School ( email )

Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States

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