Auditor Going Concern Reporting: A Review of Global Research and Future Research Opportunities

Description

Auditor reporting on going-concern-related uncertainties remains one of the most challenging issues faced by external auditors. Business owners, market participants and audit regulators want an early warning of impending business failure. However, companies typically do not welcome audit opinions indicating uncertainty regarding their future viability. Thus, the auditor’s decision to issue a "going concern opinion" (GCO) is a complex and multi-layered one, facing a great deal of tension. Given such a rich context, academic researchers have examined many facets related to an auditor’s decision to issue a GCO. This monograph reviews and synthesizes 182 recent GCO studies that have appeared since the last significant review published in 2013 through the end of 2019. The authors categorize studies into the three broad areas of GCO: (1) determinants, (2) accuracy and (3) consequences. As an integral part of their synthesis, they summarize the details of each study in several user-friendly tables. After discussing and synthesizing the research, they present a discussion of opportunities for future research, including issues created or exacerbated as a result of the global COVID-19 pandemic. This monograph will be of assistance to researchers interested in exploring this area of auditor responsibility. It will also be of interest to auditing firms and individual practitioners wanting to learn what academic research has examined and found regarding this challenging aspect of audit practice. Auditing standard-setters and regulators will find it of interest as the authors review numerous studies examining issues related to audit policy and regulation, and their effects on GCO decisions. The examination of GCO research is extremely timely given the financial and business disruption caused by the worldwide COVID-19 pandemic. This unprecedented global event has caused companies, auditors and professional bodies to revisit and reassess their approach to going concern, and to think even more deeply about this fundamental business imperative. Cover Half Title Series Information Title Page Copyright Page Dedication Table of Contents List of Figures Acknowledgments Abbreviations About the Authors 1 Introduction and Overview Notes References 2 Determinants of GCOs: Client Characteristics Measures of Financial Distress Obtained From the financial Statements Client Financial Characteristics As Reflected in the Audit Report Research on Bankruptcy Probability Measures Obtained From Outside the Financial Statements Financial Reporting Quality Corporate Governance Book Values and Liquidation Values References 3 Determinants of GCOs: Auditor Characteristics Auditor Judgments Audit Firm Size GCO Issuance and Error Rates Studies on Big N Audit Firm Mergers and Closings Other Size-Related Factors Industry Specialization Auditor Organizational Forms Firm Workload Audit Office Effects Characteristics of Audit Firm Personnel Partner Characteristics Audit Staff Characteristics Note References 4 Determinants of GCOs: Auditor–Client Relationship Characteristics Economic Bonding Fee Concessions Audit Firm Switching and Opinion Shopping Audit Firm Tenure Personal Relationships Between Auditors and Clients Audit Report Lag Other Auditor–client Relationship Factors References 5 Determinants of GCOs: Environmental Factors Global Financial Crisis Litigation Auditing Standards and the Regulatory Environment Auditing Standards Regulatory Environment Sarbanes–Oxley Effects Concluding Remarks About Regulatory Influences Market Structure and Competition National Differences Note References 6 Accuracy of GCOs GCO Accuracy and Auditor Attributes GCO Accuracy and Client Attributes GCO Accuracy and Environmental Attributes Comparisons of GCO Accuracy With Statistical Models GCO Accuracy and Alternative Measures References 7 Consequences of GCOs Consequences to Existing Shareholders Consequences for Future Shareholders Consequences for Lenders Consequences to the Client Company Consequences for Auditors Consequences for Others Note References 8 Opportunities for Future Research Research Method Issues GCO as a Measure of Audit Quality Definition of Business Failure – What is a “Non-Going Concern?” Sample Selection and Analysis Issues Opportunities for Future Research Determinants of GCOs Research on Personal Characteristics Auditor–Client Interactions Accuracy of GCOs Consequences of GCOs New Audit Reporting Formats Research on Non-Public Companies Banks and Financial Institutions Research Insights from Other Areas of Accounting and Auditing Behavioral GCO Research Notes References 9 Research Issues Related to Covid-19 New Research Issues The Impact of Government Assistance on GCOs Reviews of Auditor GCO Responsibility By Professional Bodies Issues Exacerbated By the Pandemic Calculating Type II and Type I Reporting “Error” Rates Does Auditor GCO Decision-Making Change During the Pandemic? How do Auditors Use Subsequent Event Information During the Pandemic? How Often do Auditors Mention Going-Concern Uncertainties in Interim Reports? Notes References 10 Concluding Remarks Index