How Do Auditors Perceive Client Firms’ Technological Competition? Evidence from Going Concern Opinions.

• In Event: Audit Office Resources and Control Issues in Audit

Abstract

We examine the effect of client firms’ technological competition on the likelihood that auditors issue going concern opinions. We find that client technological competition positively affects the likelihood of receiving going concern opinions. This finding is consistent with the notion that perceived audit risk increases with client technological competition so that auditors are more likely to issue going concern opinions to such clients to reduce potential litigation related cost. Further evidence shows that this positive effect is more pronounced for client firms that are financial constrained and with more technological originality, and for auditors facing higher litigation risk. Finally, we find that client technological competition reduces the probability of both Type I and Type II misclassifications, which implies that auditors improve reporting accuracy of going concern opinions in response to the higher audit risk induced by client technological competition, instead of simply being strategically conservative.

Authors

• Xiaolu Xu, University of Massachusetts-Boston

• Liu Yang, University of Miami

• Joseph H. Zhang, University of Memphis