A Cross-Country Examination of Auditor Reporting for Going-Concern Uncertainty

• In Event: Audit Reports

Abstract

The audit opinion includes an assessment of the client's going concern uncertainty. Using data from several countries, previous studies show a wide gap between going concern opinions (GCOs) and subsequent bankruptcies. This gap is often attributed to GCOs having low information content and to auditors failing to provide timely warning to investors about bankruptcies. We use a large sample of opinions from 17 countries to determine whether GCOs are better predictors of subsequent corporate defaults, including bankruptcies, than a comprehensive ex ante estimate of probability of default (PD), based on accounting and market data. Despite country-level differences in the predictability of defaults, on average, GCOs and PDs independently have similar predictive accuracy. However, GCOs and PDs do not have perfect overlap and using them together results in incremental predictive accuracy. Considering the inherent difficulties in forecasting defaults, our results suggest that GCOs contain useful information in predicting defaults across countries.

Authors

• Elizabeth Gutierrez, Universidad de Chile

• Jake Krupa, University of Miami

• Miguel A Minutti-Meza, university of miami

• Maria Ivanova Vulcheva, Florida International University