An empirical examination of the going-concern audit opinion : the auditor's decision regarding continuing going-concern opinions and the subsequent fate of companies that have received going-concern opinions

Abstract

This study identifies companies that have received initial going concern audit opinions (GC opinions) during 1985 through 1988. The study examines the state of those companies for one year after the year of the initial GC opinion, to determine if the companies continued operating independently or discontinued independent operations through bankruptcy or merging. The study identifies variables that may be associated with the subsequent state of those companies. The independent variables used in the model include: the company's level of financial distress, returns on the company's stock, riskiness of the company, management ownership of the company, and the company's size. The study uses a one-year prediction horizon because that is the horizon that an auditor is directed to consider in both Statement of Auditing Standards Number 34 and Number 59. The results indicate that the level of financial distress is associated with the subsequent state. For those companies that continue independent operations, this study identifies factors that are associated with the auditor's decision to remove the GC opinion in the year following the initial GC opinion. The variables that are expected to be associated with the removal of the GC opinion are: the company's level of financial distress, the change in the level of financial distress, returns on the company's stock, riskiness of the company, a change to a new auditor, disposal of long-term assets, debt renegotiation, issuance of additional stock, and new management. The results indicate that returns, riskiness, and debt renegotiation are associated with the removal of the GC opinion. The study also tests the stickiness hypothesis. Stickiness implies that companies improved their financial positions after their initial GC opinions to a level that would have avoided initial GC opinions, but they continued to receive GC opinions. The results support the stickiness hypothesis.