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    Recent Changes in the Association between Bankruptcies and...
    research summary posted April 13, 2012 by The Auditing Section, last edited May 25, 2012, tagged 09.04 Going Concern Decisions, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    Recent Changes in the Association between Bankruptcies and Prior Audit Opinions
    Practical Implications:

    The evidence from this study can beused to support the perspective that the auditing profession is essentially self-correcting in that it seeks to maintain a positive image and control litigation costs.  This has practical implications for regulators and legislators in that these groups should evaluate the extent of the auditing profession’s changed behavior in the post-December 2001 period before promulgating further detailed, prescriptive regulations.  Specifically, this study implies that there are multiple ways to influence auditor behavior in addition to the traditional means of changing laws and auditing standards, such as litigation, harsh media and congressional pressure.  Another source of pressure on auditor behavior, not included in the article, would be the threat of sanctions on firms and individual partners (which arguably becomes more visible in recent years with the presence of PCAOB). Further, this study has implications for regulators and legislators in that it provides evidence that auditors’ increased conservatism did not result in longer audit delays.


    Geiger, M. A., K.
    Raghunandan, and D. V. Rama.  2005.  Recent Changes in the Association between Bankruptcies and Prior Audit Opinions.  Auditing:
    A Journal of Practice and Theory
    24 (1): 21-35.

    Bankruptcy, going concern reports.
    Purpose of the Study:

    The purpose of this study is to examine if and how the events of 2001 impacted auditors’ reporting decisions with respect to going concern opinion modifications.  

    The authors note that media and congressional attention on auditors in the wake of high-profile alleged audit failures in Fall 2001 was almost entirely unfavorable.  Further, high-profile corporate failures during this time amplified this negative attention on auditors.  Given these factors, the authors investigate whether auditors’ behavior was impacted by the events of 2001.  This study examines whether auditors became more “conservative” in their opinion decisions after these events.  Specifically, this study examines the change in the rate of the issuance of going-concern modified audit opinions for firms entering bankruptcy from before the Enron scandal to after the scandal to determine: 

    •  whether bankrupt companies were more likely to have received a prior going-concern modified audit opinion after December 2001 than in the immediately preceding period, and 
    •  whether an increase in the likelihood that bankrupt companies received a prior going-concern modified audit opinion after 2001, if any, was caused by changes in auditor reporting strategies, and not only by changes in economic conditions or client characteristics.   
    Design/Method/ Approach:

    The authors use data on publicly-traded companies that filed for bankruptcy during the years 2000 to 2003. The list of bankrupt companies is obtained from New Generation Research Inc. who publishes the annual Bankruptcy Almanac

    The authors compare the likelihood of firms receiving going-concern modified audit opinions in the period before December 2001 to the period after December 2001. To rule out an alternative explanation on change in economic conditions, the authors compare auditor reporting strategies in their sample period to those during an earlier recessionary period in 1991-1992. To ascertain that change in going-concern rates after 2001 was not caused only by changes in client characteristics, the authors break down the identified change into two parts: (1) changes due to client characteristics and (2) changes in auditor reporting strategies. 

    • Auditors are more likely to issue going-concern modified audit opinions for firms entering bankruptcy in the period after December 2001. 
    • Auditors were more likely to issue prior going-concern modified opinions for firms entering bankruptcy in 2002-2003 than in the previous recession recovery period (1991-1992). 
    • The increase in going-concern modification rates for bankrupt companies after December 2001 is due to changes in auditor reporting decisions, and not solely due to changes in client characteristics between the time periods studied.  
    • The authors argue their results suggest that there was a significant shift in auditors’ decisions in the post-December 2001 period, in that auditors became more conservative in this period.  
    • The increase in the issuance of going-concern modified opinions did not result in increased audit delays.
    Accountants' Reporting
    Going Concern Decisions, Going Concern Decisions
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