The Relation between Going-Concern Opinions and the Auditor's Loss Function

Abstract

In this study I explore whether auditor incentives influence the decision to issue a going-concern disclosure to a financially distressed client. Auditor incentives have been suggested as a missing link between the literatures on financial distress prediction and going-concern assessments. While previous research has focused primarily on client financial ratios, I model the auditor's going-concern as a function not only of the client's financial condition and prospects, but also of factors associated with the auditor's loss function, including prospective audit fees, the length of the auditor-client relationship, recent auditor litigation, client losses, and the existence of previously disclosed evidence of goingconcern difficulties.