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    There’s No Place Like Home: The Influence of Home-State G...
    research summary posted July 18, 2016 by Jennifer M Mueller-Phillips, tagged 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    There’s No Place Like Home: The Influence of Home-State Going-Concern Reporting Rates on Going-Concern Opinion Propensity and Accuracy
    Practical Implications:

    The findings of this study indicate that increased home-state GC rates lead to lower GC reporting accuracy for non-Big 4 auditors. This lower GC reporting accuracy imposes economic costs on the client and the auditor, which suggests that prior GC rates may be weighted too heavily in the minds of auditors.


    Blay, A.D., J.R. Moon, and J.S. Paterson. 2016. There’s No Place Like Home: The Influence of Home-State Going-Concern Reporting Rates on Going-Concern Opinion Propensity and Accuracy. Auditing: A Journal of Practice and Theory 35 (2): 23-51. 

    auditor reporting, going-concern opinion, audit quality, Type I error, and Type II error
    Purpose of the Study:

    For a financially distressed client, the auditor’s decision to modify the audit report related to continue as a going-concern (GC) is generally considered the first public signal of imminent financial failure based on relatively private information; furthermore, a modified audit opinion is the auditor’s only means of informing outsiders of the organization’s financial condition. Consequently, two characteristics emerge regrading going-concern opinions. The first is that GC opinions can provide significant information to financial statement users. The second is that an auditor’s willingness to issue a GC opinion can signal both that the auditor is independent and that the audit is of high quality. Considerable research corroborates and relies upon the two characteristics described above. The majority of this research succeeds in identifying client financial characteristics that influence auditors’ going concern reporting decisions; however, there is not very much research that focuses on whether auditors’ circumstances and surroundings influence their propensities to issue modified opinions. This paper looks into whether auditors’ decisions to issue GC opinions are affected by the rate of GC opinions being given in the surrounding area. 

    Design/Method/ Approach:

    Partners and managers from a wide variety of accounting firms are interviewed by the authors to gain initial insight into the potential effects of state-based information. To measure the rate of proximate GC opinions, the authors analyzed 22,862 audit reports of financially distressed clients from 2001-2011. 

    • The authors found through their interviews with partners and managers that non-Big 4 auditors are likely more influenced by prior GC opinions within their state than Big-4 auditors are; ergo, the focus shifted to non-Big 4 firms for all subsequent analyses.
    • The authors find that prior-year first-time GC reporting at the state level is significantly and positively related to current-year first-time GC reporting.
    • The authors’ results show that GC reporting accuracy decreases significantly with increases in the state rate of GC opinions; furthermore, the increased issuance of GC opinions leads to increases in Type I error rates without decreases in Type II error rates.
    • The evidence found by the authors provides strong support that higher proximate GC rates impair GC reporting accuracy measured using Type I errors.
    Accountants' Reporting
    Going Concern Decisions