Systemic and Auditors’ Propensity to Issue Going Concern Opinions within the Banking Industry

• In Event: Going Concern Opinions

Abstract

In light of the fact that auditors did not issue a going concern opinion prior to several high profile bank failures, this study examines auditors’ propensity to issue going concern opinions within the banking industry during the 2007-2009 financial crisis. Specifically, our analysis explores the role of bank systemic risk in the decision to issue a going concern opinion. We measure bank systemic risk as marginal expected shortfall (Acharya, Pederson, Phillippon, and Richardson 2010) and delta-CoVaR (Adrian and Brunnermeier 2014). Based on a sample of firms in the banking industry, we document a significant negative association between a bank’s systemic risk and the likelihood of a bank receiving a going concern opinion from its auditor. Our results indicate that auditors’ propensity to issue a going concern opinion for a particular bank is partially conditioned on concerns about the negative consequences of the opinion to the entire financial industry. Cross-sectional tests indicate auditors’ systemic risk concerns are less pronounced for auditors with longer tenure and more pronounced for auditors with greater non-audit fees within the financial industry. We also find these systemic risk concerns decrease the conservatism of auditors’ going concern assessments. Moreover, bank systemic risk reduces Type I error (erroneous going concern opinion), but increases Type II error (erroneous clean opinion). Our evidence informs audit regulators and investor groups about the perceived lack of auditor-issued early warnings for subsequent bank failures during the recent financial crisis.

Authors

• Anne Albrecht, University of Missouri-Columbia

• Matt Ryan Glendening, University of Missouri-Columbia

• Kyonghee Kim, University of Missouri-Columbia

• Raynolde Pereira, University of Missouri-Columbia