Credit Ratings and the Auditor's Going-Concern Opinion Decision

• In Event: Continental Breakfast and Research & Education Forum
  In Roundtable Session: Table 3: Going Concern Opinions and Financially Distressed Firms

Abstract

This study addresses the question whether credit ratings are considered in auditors’ going-concern assessments. Given credit rating agencies’ private information access, experience and expertise, I predict that credit ratings and especially credit rating downgrades contain incremental information for auditors’ going-concern opinion (GCO) decisions. Furthermore, I investigate if the association between credit rating and GCOs, and credit rating downgrades and GCOs varies as a function of local auditor industry specialization. Based on a sample of financially distressed, U.S. public companies with Standard and Poor’s credit ratings between 2000 and 2011, I find evidence of a strong association between credit ratings and the probability of auditors issuing a GCO. In particular, companies experiencing rating downgrades are more likely to receive a GCO, and specifically more recent and more severe downgrades are associated with a higher probability of a GCO. Finally, I find modest evidence that the association between credit ratings and GCOs differs between local auditor industry specialists and non-specialists. Overall, the results are consistent with the view that credit ratings provide incremental information to auditors.

Author

• Nadine Funcke, University Maastricht