Deferred Tax Asset Valuation Allowances and Auditors’ Going Concern Evaluations

54 Pages Posted: 12 Jun 2020 Last revised: 13 May 2022

See all articles by Ashleigh Bakke

Ashleigh Bakke

University of Kansas

Thomas R. Kubick

University of Nebraska-Lincoln

Michael S. Wilkins

University of Kansas

Date Written: May 13, 2022

Abstract

The valuation allowance for deferred tax assets is an audited disclosure that reflects management’s expectations regarding the future profitability of a company. Building on prior literature that establishes this disclosure as an indicator of future distress, we examine whether the valuation allowance is associated with auditors’ going concern evaluations. We find evidence that the existence and magnitude of the valuation allowance, as well as changes in the allowance, are positively associated with the likelihood that a company receives a first-time going concern opinion. We also find some evidence that valuation allowances are associated with reduced Type I and Type II going concern opinion misclassifications. Our results suggest that the information related to management’s plans and expectations that is reflected in the valuation allowance is incrementally relevant to auditors in their assessment of a company’s likelihood of failure.

Keywords: accounting for income taxes, ASC 740, deferred tax assets, going concern, valuation allowance

Suggested Citation

Bakke, Ashleigh and Kubick, Thomas R. and Wilkins, Michael S., Deferred Tax Asset Valuation Allowances and Auditors’ Going Concern Evaluations (May 13, 2022). Available at SSRN: https://ssrn.com/abstract=3622505 or http://dx.doi.org/10.2139/ssrn.3622505

Ashleigh Bakke

University of Kansas ( email )

Lawrence, KS 66045
United States

Thomas R. Kubick

University of Nebraska-Lincoln ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Michael S. Wilkins (Contact Author)

University of Kansas ( email )

Capitol Federal Hall
1654 Naismith Dr.
Lawrence, KS 66045
United States

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