The information content of the auditor's going concern evaluation

Abstract

When there is substantial doubt about an entity's ability to continue as a going concern, professional auditing standards require the independent auditor to disclose the uncertainty in the auditor's opinion. My study assesses the information content of the independent auditor's going concern evaluation by examining the abnormal stock returns surrounding the release of the auditor's report. A sample of 68 audit reports which disclose going concern uncertainties and a sample of 86 unqualified audit reports received by financially-distressed firms were obtained. Abnormal returns were measured as market model residuals. Portfolio tests indicated that the mean abnormal return surrounding the release of the auditor's report was negative for firms which received going concern opinions and positive for distressed firms which received clean opinions. Ordinary least squares (OLS) regression tests indicated that mean abnormal returns surrounding the release of the auditor's report were lower for going concern opinions than for clean opinions and that the magnitude of the abnormal returns depended on the extent to which the opinion type was unexpected. A proxy for investor's expectations was generated from a logistic regression model which used publicly available data to estimate the probability that a firm would receive a going concern opinion. The regression tests included variables to control for unexpected default and earnings information.