Abstract
Auditors’ propensity to issue going concern (GC) opinions is commonly used as a proxy for the unobservable audit quality. In this paper we examine the validity of this proxy by empirically testing whether the propensity to issue GC opinions is indeed related to fewer audit errors. We start our analysis by categorizing auditors according to their propensity to issue GC opinions according to a GC regression model. We then test whether auditors, who have a relatively higher propensity to issue GC opinions, have lower audit opinion error rates. We obtain two main results. First, auditors’ propensity to issue GC opinions is not significantly associated with their Type II opinion error rates (a Type II error is a clean opinion for a firm that files for bankruptcy within one year of the audit opinion). Second, the auditors who issue relatively more GC opinions are more likely to make Type I errors, indicating that the additional GC opinions are being issued for the wrong companies (a Type I error is a GC opinion for a firm that does not file for bankruptcy within one year of the audit opinion). Our findings cast doubt on the link between the propensity to issue GC opinions and audit quality.
Published Version
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