Managerial Ability and the Accuracy of the Going Concern Opinion

Abstract

ABSTRACT Current audit guidance directs the auditor to modify their opinion in the presence of significant doubt about their client's ability to continue as a going concern. This paper examines whether managerial ability influences the accuracy of auditors' going concern information signal. Following prior literature, we assess accuracy based on the subsequent viability of the client. We find that, while managerial ability decreases the risk of Type I errors (the auditor issues a going concern opinion for a firm that subsequently remains viable), managerial ability increases the risk of Type II errors (the auditor issues a standard unqualified report for a firm that subsequently files for bankruptcy). Considering prior research indicates that the auditor's opinion provides important information to the market, this finding has important public interest implications regarding the signaling of bankruptcy risk to investors and creditors by auditors' going concern opinion.