Abstract
This study investigates the effects of client’s financial risk, time to bankruptcy, and auditor’s cognitive style on issuing a Going Concern Opinion (GCO) for failing companies. Empirical tests are based on financial data from 328 bankrupt firms and peer review data from 172 auditors. Cognitive style on an intuitive-analytic dimension is approximated by the degree of auditor’s compliance with the ISA standards for analytic procedures in peer review. Empirical findings support research hypotheses and show that seriousness of the financial risk and time distance to bankruptcy are important determinants of GC judgment accuracy. They also show that the performance of the cognitive style of the auditor is related to the fit between the cognitive style and the characteristics of the GC situation. The results indicate that an auditor’s individual characteristics, i.e. cognitive style, affect his/her decision making when issuing GCO. This study is the first approach that systematically investigates the relationship between financial risk, distance to bankruptcy, and cognitive style on GC judgment in an archival research.
Highlights
The Going Concern Opinion (GCO) on the financial statements of a firm is an important issue that attracts a lot of public attention
This study is the first approach that systematically investigates the relationship between financial risk, distance to bankruptcy, and cognitive style on GC judgment in an archival research
It contributes to the research on auditing and failure prediction when showing that an auditor’s accuracy in issuing a GCO largely depends on three factors: estimated financial risk of the client, time to bankruptcy, and her or his cognitive style in decision-making
Summary
The GCO on the financial statements of a firm is an important issue that attracts a lot of public attention. The main argument of this study is that in archival research the GC task complexity is related to the following two dimensions: estimated financial risk of the client and the time distance between the annual closing of accounts and the bankruptcy date. The objective of the study is to assess two sets of hypotheses on: 1) The effect of the client situation and 2) The cognitive style of the auditor on GC judgment accuracy using a sample of Finnish bankrupt firms. This study is the first approach that systematically investigates the relationship between financial risk, distance to bankruptcy, and cognitive style on GC judgment in an archival research It contributes to the research on auditing and failure prediction when showing that an auditor’s accuracy in issuing a GCO largely depends on three factors: estimated financial risk of the client, time to bankruptcy, and her or his cognitive style in decision-making. The fourth section presents the empirical findings and the last section summarizes the study
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
