How Management Disclosure and Auditor Disclosure Affect Auditor Liability: The Case of the Going Concern Financial Accounting Standard

Abstract

SUMMARY A current FASB standard requires management to assess the ability of the entity to continue as a going concern (GC) and disclose any substantial doubt about such. Using contextualized experiments wherein the auditor does not issue a GC opinion for an entity that subsequently fails, we study the effects of management disclosure, increased management disclosure responsibility, and auditor disclosure on auditor blame, a proxy for auditor liability. Consistent with predictions based on the Culpable Control Model, we find (1) management disclosure of substantial doubt increases auditor liability; (2) when management has not disclosed substantial doubt, auditor liability is greater under higher management disclosure responsibility; and (3) including a GC-related critical audit matter (CAM) in the audit report mitigates auditor liability. These findings provide insights regarding consequences to auditors of management disclosure practices, specifically regarding the FASB’s GC standard and the efficacy of auditor disclosure via CAMs to mitigate those consequences. Data Availability: Data are available upon request.