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Effect of Financial Crisis on Auditor Conservatism

Thu, March 13, 1:30 to 3:00pm, Sheraton Dallas Hotel, TBA

Abstract

The recent financial crisis and recession had a devastating effect on families and businesses around the world. This study looks at the effects of the recent financial crisis on auditors’ going-concern audit opinions. We find that not only did the number of distressed companies and the number of going-concern opinions increase during the financial crisis, but also auditors became more conservative toward distressed companies in the form of issuing a higher percentage of going-concern opinions to those companies. Even for the same level of financial ratios and bankruptcy predictors, auditors increased their likelihood of issuing going-concern opinions. This increased conservatism was very evident in 2008, but the level of conservatism had returned to normal by 2010.

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