Going‐concern audit opinions for bankrupt companies – impact of credit rating

Abstract

PurposeThe purpose of this study is to examine whether credit ratings inform auditors' going‐concern (GC) audit opinions for companies facing imminent bankruptcy.Design/methodology/approachUsing data from BankruptcyData.com the authors identify US publicly‐held, financially‐distressed companies that filed bankruptcy from January 1, 2000 through June 30, 2009. Logistic regression is applied by regressing audit opinion type on select financial, industry, and credit rating data.FindingsResults show that the likelihood of an auditor issuing a GC opinion is associated with the credit rating issued by Standard & Poor's (S&P) preceding the audit report date. In results supporting the idea that the auditor's opinion has informational value, the paper also finds that after issuance of a GC report, S&P's credit rating tends to be downgraded.Research limitations/implicationsWhile the findings indicate observable relationships between audit opinions and credit ratings, the models used in primary analysis cannot determine causality.Originality/valueThis study sheds some light on how credit ratings and audit opinions may be inter‐related in distressed companies, an issue previously not investigated in the literature.