It’s a Small World: The Influence of Home-State Bias on Auditor Going-Concern Reporting

• In Event: Audit Reports

Abstract

In auditing, one of the most important and challenging decisions is the decision to issue first-time going-concern opinions. While researchers have had considerable success identifying factors that influence auditors’ decisions, little research has addressed factors influencing cross-sectional propensities to issue modified opinions. Research from psychology and economics documents that decision-makers frequently overweight salient information. We consider the potentially salient aspect of geographic proximity to prior going-concern opinions. We hypothesize and find that, after controlling for known factors, auditors’ first-time going-concern reporting decisions are influenced by the prior-year proportion of firms in auditors’ home-states receiving first-time going-concern opinions. Specifically, this home-state bias makes a modified opinion up to 13.3% more likely, significantly decreases auditor accuracy, and also leads to higher rates of auditor change. This relation is particularly strong for smaller audit firms. Our findings challenge the notion that a higher propensity to issue a going-concern opinion reflects higher audit quality.

Authors

• Allen D Blay, The Florida State University

• James Robert Moon, The Florida State University

• Jeffrey S Paterson, The Florida State University