Audit firm characteristics and Type II errors in the going concern opinion

Abstract

According to SAS No. 59 (AICPA, 1988), auditors must modify their audit reports for uncertainties that may affect a company's ability to continue in existence. Using both auditor and company characteristics in a logistic regression model, we examine whether Big Six (now Big Five) (industry specialist) auditors are more likely to issue a going concern opinion on the financial statements immediately preceding bankruptcy than non-Big Six (non-specialist) auditors. We further partition the sample of bankrupt firms into groups based on probability of bankruptcy, default status, and events occurring after the date of the audit report. These partitions allow us to examine whether Big Six (industry specialist) auditors systematically outperform non-Big Six (non-specialist) auditors in issuing a going concern opinion in situations in which going concern assessment is more difficult. Our findings provide no evidence that Big Six (industry specialist) auditors outperform non-Big Six (non-specialist) auditors in the overall sample or in the sample partitions. © City University of Hong Kong.