Effect of Financial Crisis on Auditor Conservatism

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Abstract

The recent financial crisis and recession had a devastating effect on families and businesses around the world. This study looks at the effects of the recent financial crisis on auditors’ going-concern audit opinions. We find that not only did the number of distressed companies and the number of going-concern opinions increase during the financial crisis, but also auditors became more conservative toward distressed companies in the form of issuing a higher percentage of going-concern opinions to those companies. Even for the same level of financial ratios and bankruptcy predictors, auditors increased their likelihood of issuing going-concern opinions. This increased conservatism was very evident in 2008, but the level of conservatism had returned to normal by 2010.

Authors

• Yun-Chia Yan, The University of Texas at Brownsville

• Joseph D Beams, University of New Orleans