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The purpose of this paper is to ascertain the practical efficacy of statistical corporate failure models in improving auditors' going concern assessment. It also aims to examine auditors' perceptions of corporate failure models as an analytical procedure in this context.

The paper utilises a survey questionnaire with a case study component to evaluate the practical value of corporate failure models for assessing going concern, and to examine auditors' perceptions of such models as an analytical procedure for assessing going concern.

The results indicate that corporate failure models facilitate the formation of more appropriate going concern opinions and increase judgment consensus. Auditors perceive such models as useful in obtaining relevant evidential matter and in mitigating some of the subjectivity involved in assessing going concern. However, the results also indicate that corporate failure models are perceived to be more effective in the planning stages than at the final stages of the audit. Furthermore, auditors are seeking more explicit guidance in auditing standards on the use of corporate failure models for assessing going concern.

The study extends previous research by examining the practical efficacy of corporate failure models for assisting auditors to assess going concern in light of human information processing limitations. Further, it examines auditors' perceptions of corporate failure models as an analytical procedure, and the guidance that auditors seek on the use of such models in auditing standards.

The purpose of this paper is to conduct an experiment to examine whether investors view the going‐concern opinion as providing information that is useful in valuing companies' stocks. Prior research on this issue using archival data has produced mixed results.

An experiment is conducted with financial analysts in which the auditor's opinion and the opinion of industry specialists (proxy for market expectations) are manipulated. Participants estimated the stock price of a fictional company both before and after the issuance of an auditor's opinion.

The results strongly support the hypothesis that investors perceive the going‐concern opinion as relevant for valuing a company's common stock. Furthermore, the participants viewed the going‐concern opinion as relevant even when the report confirmed prior market expectations.

Using a controlled setting, the paper finds that investors believe that the auditor's going‐concern opinion contains useful information. This suggests that auditors' judgment regarding client viability is valued by investors. Auditing standards that require an assessment of client viability should remain in place.

This is the first study that uses an experimental approach to examine whether investors view the auditor's going‐concern opinion as relevant to pricing stocks. The use of an experiment is intended to overcome methodological limitations inherent in studies that use archival data.

Myopic going concern practice refers to the current audit going concern opinion that a firm is rewarded a favorable going concern opinion as long as it has the capability to satisfy its debt obligation in the following year. We show, via a structural agency problem we develop in the paper, that such a practice has a potential economic cost to the firm. We study Lucent Technologies Inc. in detail for its loss in economic value and also measure the magnitude of this impact with 500 companies. We find that Lucent should have lost its going concern status in 2002 as it had to sell off its assets to meet debt obligations and nearly 18% of the 500 firms suffer some degree of economic loss due to the agency problem.

Internal auditors have a direct interest in understanding how external audit firms make decisions that may have important implications for their own firm. Explores whether differently sized audit firms apply professional standards in a similar manner. Such uniform application should be expected given that all auditors should be guided by professional standards in making the qualification decision. The micro‐economic environments facing big six and non‐big six firms differ. Investigates whether big six and non‐big six firms use the same information in deciding whether to issue a going concern modification. This study found that differently sized auditing firms did not apply the standards in a similar manner and did not use information available similarly. Internal audit audiences should find this lack of uniform application of interest since the internal audit function may be called in to contribute information to the decision‐making process involved in selecting a new auditing firm. Also, the internal audit function may be involved in selecting acquisition targets for the firm. Should there be a suspicion of going concern problems involving a potential acquisition, the information provided in this paper should be useful to the internal audit function in evaluating the presence or lack of a going concern modification with respect to the potential acquisition’s financial statements.

The purpose of this paper is to examine the association between audit opinion and earnings persistence of listed companies in Thailand from 2004 to 2008.

We use archival data and hand collected data in regression analysis. Content analysis was used to perform decomposition analysis of audit modifications.

Firms receiving modified opinions have lower earnings persistence than firms receiving unqualified opinions, and the degree of earnings persistence varies among types of modifications. We find that firms with a qualified opinion or a disclaimer have lower earnings persistence than firms receiving an unqualified opinion with an emphasis of matter (UEM). However, we find no difference in earnings persistence between firms receiving a qualification and a disclaimer. Content analysis reveals that there is information in certain types of modified opinions with respect to earnings quality. Firms receiving a scope limitation qualification and a going concern disclaimer have lower earnings persistence than firms receiving an UEM due to going concern issues.

Audit modifications reflect different degrees of problematic issues in clients’ firms, resulting in different impacts on earnings persistence. Thus, policymakers and regulators should emphasize the importance of using auditors’ reports. Strengthened enforcement by regulators makes individual auditors more aware of reputation risk and more likely to express appropriate audit opinions.

We examine a broader set of modified audit opinions than those used in prior research. Our study offers the opportunity to examine the association between earnings persistence and different types of modified opinions, especially a disclaimer, which has been rarely found in prior research.

The purpose of this paper is to examine investor reactions to auditor opinions containing qualifications or an emphasis of matter paragraph related to going concern uncertainty or financial distress. In particular, abnormal returns are analyzed around audit report dates.

The event study methodology, focusing on a short event window, was used to determine whether there is an immediate market reaction to the audit report announcement, as might be expected assuming efficient stock markets.

Overall, this analysis shows that the audit reports investigated have information content for investment decisions. In particular, the qualifications expressed in the audit report have a negative effect on stock prices. It is also shown that an unqualified opinion with an emphasis of matter paragraph regarding going concern uncertainty or financial distress has a positive effect on stock prices. These results also elucidate the distinction between different types of opinions in the Italian context.

This paper has attempted to limit the possible concurrent effects on stock prices using a short window event study methodology. However, the possibility that some other event may have occurred during this event window cannot be excluded. Among the policy implications coming from this research, it is argued that the authorities should regulate the public disclosure of audit reports, so that the information becomes available to the audited company and the other stakeholders on the same day, which, in theory, would be the day that the audit process concludes with the signing of the audit report.

The findings of this paper show the relevance of audit reports, distinguishing the different impacts based on the types of audit opinions issued in a specific jurisdiction (qualified and unqualified with an emphasis of matter paragraph).

The purpose of this paper is to examine the costs to audit firms in terms of lost revenues of losing small clients due to auditor switching or client bankruptcy after issuing first-time going concern modified opinions.

A population of small Swedish companies receiving first-time going concern modified opinions in 2009 was examined to determine the effects two years later compared with a matched sample of financially stressed companies that had not received going concern modified opinions.

The results indicate that both auditor switching and client bankruptcy are positively related to receipt of going concern modified opinions. Furthermore, the authors find empirical evidence that auditors issuing first-time going concern modified opinions lose proportionately more fees through auditor switching and client bankruptcy than do auditors not issuing such opinions to financially stressed clients. Finally, the authors found that the going concern modified opinions issued by Big 4 firms are no more harmful to clients than are those issued by other audit firms.

The authors recognize a limitation of this study regarding the choice of control companies. Although the authors attempted to find similarly sized and similarly financially stressed companies from the same industries as those companies in the test group, the authors may have missed other variables relevant to auditor switching or client bankruptcy.

A practical implication for the audit profession is the increased awareness of the fact that the financial dependence issues reported in this study extend to auditors with small client companies.

This is the first study to examine fees lost due to auditor switching and client bankruptcy caused by going concern modified opinions in a population of small companies. It contributes to the mixed evidence presented in previous research as to the extent to which going concern modified audit opinions are self-fulfilling prophecies.

This study is an attempt to explore Spanish auditors' sensitivity towards financial evidence and the implications of the so‐called “recency effect” in a context of an ambiguous standard.

Using Hogarth and Einhorn's belief revision model, we designed a lab experiment to examine how presentation order affects the going concern judgments and the audit decisions of auditors, and the level of skepticism showed by auditors towards the signs of evidence. Two important factors, which may affect the decision‐making process and auditors' attitude to the evidence were also manipulated: the hypothesis frame and audit experience. The sample of subjects participating in this study comprises 81 Spanish auditors and 104 auditing postgraduate students.

It was found an order effect, whereby those auditors who received favorable evidence at the end of a series showed greater confidence in their client's continuity and thus issued less severe audit reports than in the case of when negative evidence was processed last. Further, it was did not found that experience or framing reduced the recency bias. Moreover, the estimation of auditor sensitivity to the evidence suggests a lack of professional skepticism in the evaluation of the client's going concern status.

First, the structure of auditing standards might contribute to auditors' reluctance to issue qualified audit reports. Second, the absence of skepticism might be contributing to the profound debate and notable feeling of distrust regarding the social function that the auditor profession should fulfill.

Recent major financial scandals give us a reason to question whether auditors are skeptical in the going concern task. This study expands previous research of Bamber et al. by investigating the auditors' attitude towards the evidence in the going concern evaluation.

Studies have suggested that the auditor's fear of self‐fulfilling prophecy may alter an auditor's behavior concerning the issuance of a going concern opinion. This study investigates a sample of firms that received auditor going concern opinions and ultimately resolved these opinions successfully, as evidenced by subsequent unqualified opinions. The study finds that over 70 percent of these firms provide value to shareholders when monitored over a 12 to 18 year time period. Additionally, the study finds that this result is consistent with a matching sample of firms that had not received going concern opinions. The study further suggests that shareholders do best when the firm is acquired rather than when it continues in business. Larger firms are more likely subjects of acquisition while the smallest firms simply go out of existence over time. Considering the similarity in outcomes between the resolved going concern sample and the matching sample, it appears that there is no long‐term stigma attached to having received a going concern opinion.

This paper aims to investigate the impact of qualified audit opinions on the returns of stocks listed at Amman Stock Exchange (ASE) after the introduction of the recent amendments by the International Auditing and Assurance Standard Board (IAASB) on audits reporting and conclusions. It further investigates if results differ between first time qualified and sequenced qualifications, and between plain qualified opinion and qualifications with going concern.

Audit opinions’ announcements and stock returns data are collected from companies’ annual reports for the fiscal years 2016 to 2019 while stock returns are computed from stock closing prices published at ASE website. The authors apply the event study approach and use the market model to calculate normal returns. Cumulative abnormal returns (CARs) and average abnormal returns (AARs) are computed for all qualified audit opinions’ announcements.

The empirical evidence suggests that investors at ASE do not react to qualified audit opinions announcements. That is, the authors find an insignificant impact of qualified audit opinion announcements on stock returns using both CAR and AAR estimates. The results are robust to first time and sequenced qualifications, and for qualifications with going concern. Results are also robust to the use of risk adjusted market model.

The insignificant impact of qualified audit opinions on stock returns have two potential conflicting research implications. First, the new amendments introduced to auditors’ report made them more informative and reduce the negative signals contained in the qualified opinions. That is, investors are now aware of the real causes of qualifications and not overreacting to the qualified opinion. Second, the documented insignificant impact confirms that ASE is not a semi-strong form efficient.

The apparent excessive use of qualifications should ring the bell on whether auditors misuse their power or companies are really in trouble. Hence, the Jordanian regulatory bodies need to warn auditors against the excessive use of qualifications on the one hand, and to raise the awareness of investors on the implications of auditors’ opinions on the other hand.

This study is innovative in twofold. First, it explores the impact of qualified audit opinions on stock returns after the introduction of new amendments by IAASB at ASE. In addition, it uses event study approach and distinguishes between first time qualified and sequenced qualifications, and between plain qualified opinion and qualifications with going concern. The results are consistent with efficient market theory and behavioral finance explanations.