Government Contracting and the Continuation as a Going Concern

• In Event: Audit Reports

Abstract

We investigate whether having the government as a customer, i.e., government contracting, is associated with the likelihood of receiving a going concern modified audit opinion (GCO). Auditors have access to firms’ customer contracts, and are expected to review firms’ dependence on customers in judging firms’ abilities to continue as going concerns. We find government contracting firms are less likely to receive GCOs. However, we also find that the loss of government contracts in the subsequent year increases the likelihood of receiving a GCO in the current year, suggesting that auditors are adhering to the 12-month forward looking assessment of going concern violations mandated by U.S. auditing standards. Our results indicate that the market reacts more negatively to government contracting firms’ receipt of a first-time GCO. Additional analysis provides evidence that the likelihood of delisting or filing for bankruptcy is less for firms whose customer base includes the government.

Authors

• Qing Liao Burke, Miami University

• Amanda Convery, University of Wisconsin–Madison

• Hollis Ashbaugh Skaife, University of Wisconsin–Madison