Are Going‐Concern Issues Disclosed in Audit Reports Associated with Subsequent Bankruptcy? Evidence from the United States

14 Pages Posted: 23 May 2020

See all articles by Vikram Desai

Vikram Desai

Nova Southeastern University

renu desai

Nova Southeastern University

Joung W. Kim

Nova Southeastern University

Kannan Raghunandan

American Real Estate Society - Florida International University

Date Written: March 2020

Abstract

The Public Company Accounting Oversight Board (PCAOB) has expressed interest in the following issues related to going‐concern modified audit opinions (GCOs): auditor's communication of factors that led to the GCO, the role of liquidity versus other factors in GCOs, and the subsequent failures of clients with GCOs. We use a sample of 2,921 first‐time GCOs spanning the years 1999 to 2015 in the United States and find that profitability factors are cited in 81% of GCOs while liquidity issues are cited in 56% of GCOs. Overall, 16.8% of the first‐time GCO clients entered bankruptcy within one year. After controlling for the probability of bankruptcy, client size, and auditor type, for clients of Big N auditors, the disclosure of profitability factors in the GCO is associated with a higher likelihood of subsequent bankruptcy; in contrast, for clients of non–Big N auditors, disclosures of liquidity and solvency problems are associated with a higher likelihood of subsequent bankruptcy. Our findings provide an empirical grounding for the debates surrounding GCOs and provide useful information for standard‐setters and financial statement users.

Keywords: Audit Opinion, Bankruptcy, Going Concern

Suggested Citation

Desai, Vikram and desai, renu and Kim, Joung W. and Raghunandan, Kannan, Are Going‐Concern Issues Disclosed in Audit Reports Associated with Subsequent Bankruptcy? Evidence from the United States (March 2020). International Journal of Auditing, Vol. 24, Issue 1, pp. 131-144, 2020, Available at SSRN: https://ssrn.com/abstract=3602859 or http://dx.doi.org/10.1111/ijau.12183

Vikram Desai (Contact Author)

Nova Southeastern University ( email )

Renu Desai

Nova Southeastern University

Joung W. Kim

Nova Southeastern University ( email )

3301 College Avenue
Ft. Lauderdale, FL 33314
954-262-5110 (Phone)
954-262-3974 (Fax)

Kannan Raghunandan

American Real Estate Society - Florida International University

1101 Brickell Ave Ste 1100S
Miami, FL 33131-3113
United States

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