Third-Party Consequences of Changes in Managerial Fiduciary Duties: The Case of Auditors’ Going Concern Opinions

Abstract

This study examines the effect of managerial fiduciary duties on the likelihood of firms receiving going concern (GC) opinions from their auditors. We exploit an influential 1991 legal ruling that expanded fiduciary duties of corporate directors and officers in favor of creditors for near-insolvent Delaware firms. Our difference-in-differences test reveals an increase in GC opinions following the ruling for near-insolvent Delaware firms. Further tests indicate an increase in type I audit opinion errors and no change in audit risk after the ruling. Additional analysis shows that, after the ruling, near-insolvent Delaware firms are less likely to dismiss their auditors following the receipt of a GC report. Overall, our findings are consistent with managers and directors with increased fiduciary duties toward creditors exerting less pressure on auditors and allowing them to reveal more GC opinions. Our results highlight important third-party consequences of changes in managerial fiduciary duties. This paper was accepted by Shiva Rajagopal, accounting.