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    The changing relationship between audit firm size and going...
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.04 Going Concern Decisions, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    The changing relationship between audit firm size and going concern reporting.
    Practical Implications:

    The results raise an interesting policy issue related to the ability of financially stressed clients to hire an audit firm. While the results of the study indicate that financially stressed clients are still able to hire an audit firm, their options appear to be decreasing over time. To the extent that their audit firm options continue to shrink over time, some financially stressed public companies may be unable to hire an audit firm in the future. Evaluating the implications and potential consequences to these firms represents an important area for further research. 


    Kaplan, S. E., and D. D. Williams. 2012. The changing relationship between audit firm size and going concern reporting. Accounting, Organizations & Society 37 (5): 322-341.

    decentralization in management, financial stress, going concern report
    Purpose of the Study:

    Under Generally Accepted Auditing Standards (GAAS), audit firms have the responsibility to evaluate the going concern status of each of their clients and to include explanatory language in their report when they conclude that there is “substantial doubt” about a client’s ability to continue as a going concern (GC) over the next year. This responsibility has been controversial, as well as consequential. Generally, managers of public companies prefer not to receive a GC report, in part because equity markets react negatively when a GC report is issued. However, issuing a GC report presumably lessens the litigation risks audit firms face from investors seeking to recover their losses.

    The purpose of the current study is to provide longitudinal evidence on the changing relationship between audit firm size and auditor going concern reporting. The study focuses on three classes of audit firms (e.g., Big N, national, and regional) across four different ERAs. Over time, the authors expect that financially stressed public companies will increasingly be audited by regional audit firms, who in turn will increasingly report more conservatively as demonstrated by a higher propensity to issue a GC audit report.

    Design/Method/ Approach:

    The authors collected data for public companies over a 22-year period between 1989 and 2010, primarily derived from COMPUSTAT and supplemented by Compact Disclosure, CRSP, AuditAnalytics, and SEC filings. The authors refer to the 199,921 firm-year observations as the All Firms sample. Two other samples were also identified.


    The authors document that across the ERAs, financially stressed public companies are increasingly audited by regional audit firms. Specifically, the evidence indicates that regional firms only audited approximately 16% of financially stressed public companies in the first two ERAs, but over 30% in the last two ERAs. While a variety of factors are involved, this change reflects, in part, a decreasing willingness by larger audit firms to audit financially stressed public companies.

    The authors also document that for their financially stressed public companies, regional audit firms were more likely to issue a GC report in the latter ERAs, whereas Big N and national audit firms were increasingly less likely to issue a GC report. In the case of regional firms, the authors believe this change reflects, in part, increases in regional firms’ exposure to catastrophic litigation. They also believe the change among Big N firms reflects, in part, increases in Big N firm reliance on client screening as a mechanism to control their firm’s exposure to litigation risks.

    Accountants' Reporting, Auditor Judgment
    Going Concern Decisions, Going Concern Decisions