Auditor Going Concern Reporting

A Review of Global Research and Future Research Opportunities

Marshall A. Geiger, Anna Gold, Philip Wallage

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000392036
• Edition: 1
• Topic: Business
• Subtopic: Auditing
• Index: Business

Auditor reporting on going-concern-related uncertainties remains one of the most challenging issues faced by external auditors. Business owners, market participants and audit regulators want an early warning of impending business failure. However, companies typically do not welcome audit opinions indicating uncertainty regarding their future viability. Thus, the auditor's decision to issue a "going concern opinion" (GCO) is a complex and multi-layered one, facing a great deal of tension. Given such a rich context, academic researchers have examined many facets related to an auditor's decision to issue a GCO. This monograph reviews and synthesizes 182 recent GCO studies that have appeared since the last significant review published in 2013 through the end of 2019.

The authors categorize studies into the three broad areas of GCO: (1) determinants, (2) accuracy and (3) consequences. As an integral part of their synthesis, they summarize the details of each study in several user-friendly tables. After discussing and synthesizing the research, they present a discussion of opportunities for future research, including issues created or exacerbated as a result of the global COVID-19 pandemic.

This monograph will be of assistance to researchers interested in exploring this area of auditor responsibility. It will also be of interest to auditing firms and individual practitioners wanting to learn what academic research has examined and found regarding this challenging aspect of audit practice. Auditing standard-setters and regulators will find it of interest as the authors review numerous studies examining issues related to audit policy and regulation, and their effects on GCO decisions. The examination of GCO research is extremely timely given the financial and business disruption caused by the worldwide COVID-19 pandemic. This unprecedented global event has caused companies, auditors and professional bodies to revisit and reassess their approach to going concern, and to think even more deeply about this fundamental business imperative.

Part I

1Introduction and overview

Reporting on going-concern-related uncertainties has been, and remains, one of the most challenging issues faced by external auditors. Even though professional standards do not hold external auditors responsible for predicting future events, such as the subsequent viability of audit clients, if an auditor refrains from issuing a going-concern modified audit opinion (hereafter GCO) and the client company subsequently fails (referred to in the academic literature as a “type II” reporting error¹), the costs to the auditor in terms of increased litigation costs and loss of reputation are often substantial (Carcello and Palmrose 1994). At the same time, companies usually do not welcome a GCO from their auditor, as it includes mention that the auditor has significant doubt about the company continuing in business through the next fiscal year and directs the reader to the appropriate disclosures in the financial statements. These indications of doubt by the auditor generally do not go unnoticed by those interested in the reporting company. Accordingly, if an auditor renders a GCO to a financially distressed client there is often a significant negative reaction from both owners/stockholders and creditors to this opinion coming from a professional with considerable inside information regarding the company. Such negative responses often increase the concern that the GCO itself may precipitate, or at least accelerate, the financial distress of the already troubled company, resulting in a self-fulfilling prophecy. Further, if an auditor renders a GCO to a client that subsequently survives (referred to in the academic literature as a “type I” reporting error), these clients are significantly more likely to switch to another auditor for their next audit (Geiger, Raghunandan and Rama 1998), thereby causing the auditor to lose a client that remains a viable, audit fee-paying company. It is not surprising, then, that audit practitioners, company managers, regulators and standard-setters around the world continue to grapple with this complex issue.²

In this monograph we review and discuss the recent academic literature pertinent to the auditor’s decision to issue, or not issue, a GCO, and the implications of a GCO for companies and other related parties. Our review begins with research available after the 2013 going-concern research synthesis provided in Carson, Fargher, Geiger, Lennox, Raghunandan and Willekens, and continues through December 2019. We attempt to minimize the gap and the overlap in the research discussed in Carson et al. (2013) and our work. Further, in our strive to be as comprehensive as possible, unlike Carson et al. (2013), we do not limit our coverage to published research, but also include papers accepted for journal publication and well-developed working papers in the public domain, particularly if we believe they make a significant contribution to the literature. In order for our review to provide a consistent categorization of the main issues explored in the recent literature, we adopt the basic GCO reporting framework presented by Carson et al. (2013) and reproduced in Figure 1.1. Accordingly, our review categorizes research into studies that: examine the determinants of GCOs (Chapters 2 through 5), assess the accuracy of GCO reporting decisions (Chapter 6) and examine the consequences of GCOs (Chapter 7). We attempt to minimize multiple categorizations of studies by discussing them in the chapter reflecting the primary focus of the research, as determined by the respective authors’ framing of the issues, events and associations examined.³ Nevertheless, there remain studies discussed in multiple sections of our review.

Figure 1.1Audit reporting of going-concern uncertainty research framework

Reproduced with permission from Carson et al. (2013)

We examine the literature on GCOs beginning with some of the studies in 2010 to 2012 that were not included in the Carson et al.’s (2013) review and conclude with studies that were published or included in the public domain through December 2019. Specifically, we search accounting and auditing journals (see Appendix 1.1 for the list of journals) and the Social Science Research Network for research published or posted from 1 January 2012 to 31 December 2019 for articles having the search terms “going concern” or “going-concern” anywhere...

Table of contents

• Cover
• Half Title
• Series Information
• Title Page
• Copyright Page
• Dedication
• Contents
• List of illustrations
• Acknowledgments
• List of abbreviations
• About the authors
• Part I
• Part II
• Part III
• Part IV
• Index