The Financial Crisis and Audit Reporting for Going Concern Uncertainty: Evidence from the Banking Industry

• In Event: Financial Institutions and the Financial Crisis

Abstract

We examine going concern opinions issued to banks before, during, and after the financial crisis. Although auditors have been criticized for not properly issuing such reports prior to bank failures during the financial crisis, we find that the incidence of such reports increases both during and after the crisis. Specifically, prior to the crisis, auditors give going concern opinions to about 3 percent of distressed banks and the proportion increases to 5 percent during crisis years and 11 percent afterward. The crisis and post-crisis years are associated with a greater likelihood of banks receiving going concern opinions even after controlling for bank-specific risk, suggesting that auditors adjusted their propensity to issue going concern opinions in response to the crash, and continue to issue more such reports even after the crisis faded. In addition, we find that during and after the crisis auditors are less likely to erroneously issue going concern reports to banks that do not fail (less likely to commit Type I errors) than the pre-crisis period and we find limited evidence that failed banks are more likely to have prior going concern opinions in the post-crash period (fewer Type II errors) These results are consistent with auditors simply reporting more conservatively for banks during and after the financial crash.

Authors

• Adi Masli, The University of Kansas

• Christine Porter, The University of Kansas

• Susan Scholz, The University of Kansas