Greater Reliance on Major Customers and Auditor Going Concern Opinions

Posted: 19 Jun 2019

See all articles by Dan S. Dhaliwal

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Paul N. Michas

University of Arizona - Eller College of Management

Vic Naiker

University of Melbourne - Faculty of Business and Economics

Divesh Sharma

Kennesaw State University, School of Accountancy

Date Written: June 11, 2019

Abstract

In this study we predict and provide evidence that distressed firms that rely more heavily on major customers for sales have a comparatively higher incidence of receiving going concern opinions (GCOs). Moreover, we find that the effect of increased reliance on major customers is driven by firms that are more distressed. We also theorize that variations in key characteristics of the relationship between distressed firms and their largest major customer are incrementally linked to GCOs, and present evidence consistent with this. Specifically, we find that the effect of greater reliance on major customers is driven by firms that are relatively smaller than their largest major customer. Additionally, we find that greater reliance on major customers is positively (negative) associated with GCOs when firms are in a shorter (longer) relationship with their major customer and when firms have a different auditor to (same auditor as) the largest major customer. Overall, our study indicates that supply-chain relationships are relevant business risks associated with auditors’ going concern assessments.

Keywords: going concern, major customer, financial distress, customer reliance, sales dependence

JEL Classification: M49

Suggested Citation

Dhaliwal, Dan S. and Michas, Paul N. and Naiker, Vic and Sharma, Divesh Shankar, Greater Reliance on Major Customers and Auditor Going Concern Opinions (June 11, 2019). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3402529

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Paul N. Michas (Contact Author)

University of Arizona - Eller College of Management ( email )

Tucson, AZ 85721
United States

Vic Naiker

University of Melbourne - Faculty of Business and Economics ( email )

198 Berkeley Street
Melbourne, Victoria, 3010
Australia

Divesh Shankar Sharma

Kennesaw State University, School of Accountancy ( email )

Kennesaw, GA 30144
United States

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