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The purpose of this paper is to examine whether insider trading surrounding a first‐time going concern audit opinion is associated with a firm's future bankruptcy status.

Hypotheses are developed predicting that insiders of firms receiving going concern opinions (GCOs) trade in a manner consistent with private assessments of the firms' bankruptcy risk. Hypothesis testing involves univariate and logistic regression analysis of 363 firms receiving GCOs between 1996 and 2001.

As predicted, results indicate that changes in top executives' net selling (i.e. sales less purchases) immediately before and after the GCO are positively associated with the likelihood of bankruptcy over the following two years. Supplemental analysis reveals this finding is a function of insiders within the bankrupt sample reporting fewer purchase transactions surrounding the GCO event.

The results of the study have the potential to influence external stakeholders' assessments of GCOs and insider trading disclosures.

This study extends prior research examining the link between GCOs and clients' subsequent bankruptcy status by highlighting the potential for insider trading activity to serve as an, ex ante, identifier of Type I audit reporting errors. This study contributes to the insider trading literature by identifying the GCO as a specific type of price‐relevant information that potentially underlies insider trades. Consideration of the study's findings should include the possibility of model misspecification and measurement error in the variables of interest. Furthermore, the study's inability to isolate the specific factor(s) underlying the documented changes in insider trading is highlighted.