Going-Concern Judgments: An Experimental Test of the Self-Fulfilling Prophecy and Forecast Accuracy

33 Pages Posted: 21 Jun 2004

See all articles by Robert R. Tucker

Robert R. Tucker

Fordham University - Accounting Area

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting

Abstract

Statement on Auditing Standards No. 59 requires auditors to assess whether substantial doubt exists about a client's ability to remain a going concern. This study reports an experimental economic test of a game-theoretic model of that judgment. Competing behavioral predictions are based on loss avoidance, risk seeking, altruism, and adversarial play. We also examine how strategic dependence affects auditors' and clients' propensity to depart from equilibrium.

The auditor conveys to the client a forecast on business survival and the intention to express a clean or going-concern opinion. The client can attempt to avoid a going-concern opinion and its potential self-fulfilling prophecy effect by switching auditors. Several subjects played pure strategies consistent with loss avoidance, adversarial play, and risk seeking. Nevertheless, the experimental results support the model's prediction that the first treatment variable, self-fulfilling prophecy, leads auditors to express fewer going-concern opinions and leads clients to switch auditors more frequently, particularly when the audit evidence has low forecast accuracy. The second treatment variable, forecast accuracy, also has a significant effect on subject behavior. However, in contrast to the model's predictions, inaccurate forecasts did not lead auditors to express more clean opinions but led clients to switch auditors more frequently.

Keywords: Experimental economics, auditing, altruism, adversarial, loss avoidance, going concern opinions, self-fulfilling prophecy

JEL Classification: M40

Suggested Citation

Tucker, Robert R. and Matsumura, Ella Mae and Subramanyam, K.R., Going-Concern Judgments: An Experimental Test of the Self-Fulfilling Prophecy and Forecast Accuracy. Journal of Accounting & Public Policy, Vol. 22, pp. 401-432, 2003. Available at SSRN: https://ssrn.com/abstract=557065

Robert R. Tucker (Contact Author)

Fordham University - Accounting Area ( email )

Graduate School of Business
113 W. 60th Street
New York, NY 10023
United States
212-636-6121 (Phone)

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-9731 (Phone)
608-265-6040 (Fax)

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5017 (Phone)
213-747-2815 (Fax)

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