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    The Auditor’s Going- Concern Opinion as a Communication of R...
    research summary posted October 10, 2013 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 Auditor’s Going- Concern Opinion as a Communication of Risk
    Practical Implications:

    The results of this study have very important implications to auditors of publicly traded firms whose audit reports are available to the general public. Auditors should always keep in mind that their opinion has great importance to the market’s perception of their client. The effects that issuing a going-concern modified audit opinion can have on the market perception of a firm’s value, as evidenced by the different market perceptions for similarly financially distressed firms when one had a going-concern modified report and one did not, are grave enough to warrant significant consideration by auditor’s deciding whether or not the going-concern modified opinion is necessary.

    For more information on this study, please contact Allen D. Blay.


    Blay, A.D., M.A. Geiger, and D.S. North. 2011. The auditor’s going- concern opinion as a communication of risk. Auditing: A Journal of Practice and Theory 30 (2): 77-102.

    auditor’s opinion; going- concern; value-relevance; financial distress.
    Purpose of the Study:

    The auditor’s report is the only lawful way for auditors to communicate with the general public concerning business matters of a particular client. The information conveyed in the audit report is usually limited to an opinion of the accuracy and completeness of the client’s financial information and the related disclosures. However, SAS 59 requires the auditor to add modified language to the standard audit report when it is deemed necessary. An occurrence that makes modified wording necessary is the auditor’s belief that substantial doubt exists that the client will continue to be viable over the next reporting year. This situation illustrates the only way that an auditor can indicate his or her perceived risk regarding the continuity of a client’s business. This study provides evidence regarding the effects of an auditor’s communication of business risk through the issuance of a going- concern modified audit report for the first time for a particular client on the valuation mechanisms used by the securities market to adjust share price. The authors studied how a going- concern modified audit report affected the market’s perception of financially distressed firms in order to assess the relevance of specific nonfinancial information communicated by the external auditors in the audit report.

    Design/Method/ Approach:

    The data for this study was collected from Compustat and 10-K filings in the SEC EDGAR database for the period 1989-2006. The authors chose to study durable manufacturing firms that met one of four distress criteria: operating loss, bottom line loss, negative working capital, or negative retained earnings in the last three years. For comparison, these firms were then matched to similar firms that had not received a modified audit report and financial and market data was gathered for both types of firms.

    • The issuance of a going-concern modified audit report in the U.S. conveys substantial value relevant information about the abandonment risk of a firm.
    • Market valuation is significantly altered from the traditional measures of a focus on both the income statement and balance sheet to a focus on solely the balance sheet in the year that a firm receives a going-concern modified opinion for the first time.
    • The market increases the value of assets and liabilities that are directly related to abandonment value such as, cash, receivables, and long-term assets and liabilities, while it devalues assets that would generally possess more value if the firm continued in existence and were not liquidated such as inventory.
    • The book value of equity has a greater valuation weight for firms receiving a first-time going-concern modified audit report compared to their earlier years and to similarly financially distressed firms that did not receive a modified audit report for going-concern.
    • These results hold even after controlling for several other measures of financial distress, expanding the control sample of distressed firms, and examining individual sub-periods within the 18 year examination period.
    • The market interprets the going-concern modified audit opinion as an important communication of risk that results in a substantial shift in the structure of the market valuation for distressed firms. The market perceives the auditor’s opinion as incrementally value-relevant even when paired with other financial distress measures that exist in the financial statements.
    Accountants' Reporting, Auditor Judgment
    Going Concern Decisions, Going Concern Decisions