شواهد محافظه کاری حسابرس طولانی مدت
Abstract
1- Introduction
2- Background and hypotheses
3- Research method
4- Results
5- Summary and conclusions
References
Abstract
Geiger, Raghunandan, and Rama (2005) examine auditor going-concern decisions prior to client bankruptcy in the periods surrounding the enactment of the Sarbanes-Oxley Act (2002) at the start of this century and find evidence of improved conservatism. Feldmann and Read (2010) replicate and extend Geiger et al. (2005) and find that the proportion of going-concern opinions (GCOs) increases sharply in the post-SOX period (2002 − 2003) relative to the pre-SOX period (2000 − 2001). They show, however, that the improvement in conservatism is largely transitory and that the GCO ratio quickly declines over time, ultimately returning to its pre-SOX level by 2006. In this paper, we examine the prior audit opinions that auditors issued for a sample of 340 U.S. public companies that filed for bankruptcy during the years 2006–2015, a period that includes the recent Great Recession (hereafter, GR). Our analysis sheds light on whether the enormity of the GR resulted in a long-lasting change toward conservatism in auditor going-concern decisions on bankrupt clients. Controlling for confounding factors, we find that auditors were significantly more likely to issue GCOs to subsequently bankrupt clients following the onset of the GR. Finally, controlling for confounding factors, we find no significant change in the propensity of auditors to issue a GCO during the two post-GR recovery periods compared to going-concern decisions during the GR.
Introduction
U.S. legislators expressed concerns that companies often fail shortly after receiving a standard (unmodified) audit opinion, and criticized auditors for failing to warn the public of their client's impending financial collapse (cf., U.S. House of Representatives, 1985, 1990, 2002; U.S. Senate, 2002). Auditors, through going-concern modified audit opinions (hereafter, GCOs), publicly convey their assessment of whether substantial doubt exists about the client's ability to remain viable and continue as a going-concern. Kida (1980) and Mutchler (1984) suggest that auditors perceive a greater risk of economic loss when a client files for bankruptcy without having received a prior GCO. Prior research finds that auditors, in approximately 50% of the cases, make Type II errors (i.e., issuance of an unmodified audit opinion in the year preceding the filing of bankruptcy).1 Researchers who examine auditor going-concern decisions prior to client bankruptcy find that reporting conservatism strengthened in the wake of the Enron debacle. For example, Geiger, Raghunandan, and Rama (2005) report that U.S. bankruptcies that have audit opinions dated in the post-Sarbanes-Oxley (hereafter, SOX) period (2002–2003) were more likely to contain a GCO compared to opinions issued during the period between January 2000 and October 2001.2 Later, Feldmann and Read (2010) examine audit opinions preceding the filing of bankruptcy over four time periods from 2000 to 2008 to assess whether the auditor conservatism reported by Geiger et al. (2005) persisted or was transitory. They find that while the proportion of GCOs increased sharply during the 2002–2003 period compared to the 2000–2001 period (as in Geiger et al., 2005), the proportion of GCOs declined during the periods that follow, ultimately returning to its pre-SOX levels. The exogenous shock of the recent Great Recession (hereafter, GR), which resulted in a significant increase in public company bankruptcies, re-ignited interest in auditor reporting on financially distressed firms.3 Carson et al. (2013) note that concerns about the accuracy of auditor going-concern reporting were especially salient during the GR. Geiger, Raghunandan, and Riccardi (2014) also stress that it is during periods of economic strife, similar to the GR, when investors look to auditors for guidance in evaluating the continuing viability of companies. Hence, in this paper, we examine the prior audit opinions for 340 public companies that filed for bankruptcy during the years 2006–2015. Motivation for this study comes from the need to assess if the severity and duration of the GR resulted in a relatively long-lasting change toward conservatism in auditor reporting on bankrupt clients. Carson et al. (2013; p. 28) state that “whenever there is a sudden external shock, it is natural to think that there will be an immediate reaction; a more important question, perhaps, is how long the effects last. [Emphasis added]” In line with Carson et al.'s (2013) point of emphasis, we first examine whether auditor conservatism changed in response to the GR and then test whether auditors' response to GR persisted during the post-GR periods.