Silence as Information: What Does a Standard Unqualified Audit Opinion Mean Under the Going Concern Financial Accounting Standard?

Abstract

A recent FASB standard requires an entity’s management to assess the entity’s ability to continue as a going concern and disclose substantial doubt about such. In contextualized experiments wherein the entity’s auditor does not issue a going concern opinion and the entity subsequently fails, we examine the effects of this new standard on jurors’ judgments of auditor liability, operationalized as auditor blameworthiness for investor losses. We find: (1) when management has not disclosed going concern issues, blame ascribed to auditors for investor losses increases under the new standard; (2) auditor blame increases further when management has disclosed going concern issues; and (3) inclusion of a going concern-related critical audit matter (CAM) in the audit report mitigates these adverse effects of the new standard on auditor liability. These findings provide insights regarding unintended consequences to auditors of the new FASB standard and the efficacy of CAMs to mitigate those consequences.

Keywords: ASC 205-40/ASU 2014-15, going concern, CAMs, auditor liability

JEL Classification: M41, M42