The Auditor’s Going Concern Opinion and Management’s Forward Looking Disclosures: Evidence from the MD&A

• In Event: Audit Reports / Intermediaries

Abstract

This study examines the relationship between the auditor’s going concern opinion and the MD&A forward-looking disclosures. The research objective is two-fold and focuses on whether the presence of a going concern opinion is associated with variations in (1) the quantity and (2) the level of equivocation in the forward-looking management disclosures in the MD&A. The study employs automated content analysis techniques on a sample of 2,365 MD&As extracted from the 10-K fillings over the fiscal years 2010-2014 for companies in financial distress. The results show strong evidence that, despite the more stringent regulatory environment which promotes forward-looking disclosure in the presence of a going concern opinion, management provides less disclosure of this type in the MD&A. However, management becomes more explicit in describing the company’s plans by using less equivocal language within the forward-looking disclosures. An important finding is however that forward-looking disclosures are associated differently with the first time versus recurring going concern opinion. Unlike the recurring ones, first-time going concern opinions are associated with an increase in both the quantity as well as the equivocation level of the forward-looking disclosures. The difference in results could be interpreted as evidence that the management disclosure decision process is different in the presence of a first time versus a recurring going concern opinion.

Authors

• Maria Enev, VU Amsterdam

• Marshall A Geiger, University of Richmond

• Anna Gold, VU University Amsterdam

• Philip Wallage, University of Amsterdam