The Effects of Financial Distress Type and Distress Duration on Going Concern Opinion

• In Event: Auditing Issues Roundtable

Abstract

This study addresses the question whether auditors differentiate or put equal emphasis on each financial distress type and distress duration for their going concern opinions. The recent studies have examined the association of going concern opinion with different auditor or firm level variables for the firm samples in which financial distress factors are not unified. In fact, researchers neither elaborate the reason of their choice for financial distress type nor indicate the duration of financial distress for the firms in their sample. However, auditors are expected to classify distress factors and distress duration according to their information content. Therefore, present study attempts to examine the association of 5 financial distress types and 3 distress periods with auditors’ going concern opinions through controlling auditor and firm level variables practiced in the previous studies for financially distressed firms. The study sample includes publicly listed industrial firms between 2004 to 2017 in North America. The results highlight that auditors consider the information content of financial distress types and distress periods at different magnitudes for their going concern opinions. Thus, these findings suggest for researchers and practitioners to be cautious to establish their financial distress samples to examine the auditors’ going concern opinion.

Authors

• Ibrahim Onur Oz, University of Hartford

• Tezer Yelkenci, Izmir University of Economics