Abstract
We examine whether auditors appear to use information related to client debtor-in-possession (DIP) financing in the going concern decision. DIP financing consists of post-bankruptcy financing which is positively associated with bankruptcy emergence. Statement on Auditing Standards No. 59 (SAS 59) directs auditors’ attention to debt restructuring to mitigate financial distress. Accordingly, we hypothesize that auditors interpret DIP financing as a mitigating factor and are thus less likely to modify the audit opinions of firms receiving DIP financing. We find that auditors are less likely to issue a modification for clients receiving DIP financing, consistent with auditors treating its receipt as a mitigating factor in the going concern decision.
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