Auditors' Decision-Making Under Going-Concern Uncertainties in Low Litigation-Risk Environments: Evidence from Hong Kong

39 Pages Posted: 7 May 2006

See all articles by Kevin C. K. Lam

Kevin C. K. Lam

Hang Seng Management College; The Chinese University of Hong Kong (CUHK) - School of Accountancy

Yaw M. Mensah

Rutgers Business School - Newark & New Brunswick

Abstract

This study examines the audit opinions issued by auditors in a low litigation-risk environment at a time of high economic uncertainty - that of Hong Kong in the period immediately after the Asian financial crisis of 1997. Empirical research using United States data has shown that, contrary to professional guidance which restricts the issue of "disclaimer of opinion" only to situations where existing uncertainties prevent the auditor from forming an opinion, auditors tend to use the "disclaimer" report (in the going concern context) to signal more extreme client firm's distress. In the high litigation risk environment of the US, researchers have attributed this tendency to the idea that "disclaimer of opinion" reports are used by auditors to provide some protection against potential legal liability. The results of this study provide evidence that, even in the low litigation-risk environment of Hong Kong, auditors still use "disclaimer" reports to signal more extreme client firm financial distress. Thus, the maintenance of a high litigation risk environment does not appear to be a necessary pre-requisite for high quality audits.

Keywords: Audit opinions, disclaimer of opinion, financial condition, litigation risk

JEL Classification: M29, N25, l85

Suggested Citation

Lam, Kevin C. K. and Mensah, Yaw M., Auditors' Decision-Making Under Going-Concern Uncertainties in Low Litigation-Risk Environments: Evidence from Hong Kong. Journal of Accounting and Public Policy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=899323

Kevin C. K. Lam (Contact Author)

Hang Seng Management College ( email )

Hang Shin Link
Siu Lek Yuen
Shatin, Hong Kong
China

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong

Yaw M. Mensah

Rutgers Business School - Newark & New Brunswick ( email )

100 Rockafeller Road
Piscataway, NJ 08854
United States
848.445.4369 (Phone)
732.445.0351 (Fax)

HOME PAGE: http://business.rutgers.edu

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