Can Bad News be Good News? Investor Reactions to Going Concern Critical Audit Matters

Abstract

A going concern critical audit matter (CAM) differs from other CAMs because it involves deciding whether the company is likely to become insolvent instead of evaluating whether the financial statements are in accordance with Generally Accepted Accounting Principles. When assessing a company's financial viability, the auditor has three options in the going concern decision: (1) no going concern CAM or audit report modification, (2) a going concern CAM with no audit report modification, or (3) a going concern report modification. We examine investors' reactions to an audit report containing a going concern CAM without an accompanying going concern audit report modification. Investors interpret this event as a positive signal (i.e., the auditors assessed that the company will remain solvent). Our results suggest that going concern CAMs provide decisionrelevant information to investors about the solvency of their clients.

Keywords: Critical Audit Matters, Going Concern Opinions, PCAOB

JEL Classification: M42