Non-GAAP Earnings and Auditors' Going Concern Opinions

• In Event: Distress, Restatements, and Auditor Opinions

Abstract

We examine the role of non-GAAP earnings in auditors’ going concern assessments, focusing on firms with a GAAP loss but a non-GAAP profit (i.e., a non-GAAP switch to profit). If auditors consider non-GAAP switches as informative about future loss reversals, they will be less likely to issue a going concern opinion relative to other GAAP loss firms. Using both manager-reported and analyst-reported non-GAAP earnings, we find that auditors are less likely to issue a going concern opinion when there is a non-GAAP earnings switch. However, this result disappears for manager-only non-GAAP switches, suggesting that auditors react skeptically to manager-reported non-GAAP switches unless confirmed by analysts. We also find that the weight auditors’ place on non-GAAP switches in their going concern assessments is generally consistent with the weight implied by a bankruptcy prediction model. Overall, our evidence indicates that auditors incorporate credible signals of non-GAAP switches into their going-concern assessments.

Authors

• Anne Albrecht, Texas Christian University

• Zeyun (Jeff) Chen, Texas Christian University

• Karen K Nelson, Texas Christian University