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Costs Associated With Going‐Concern‐Modified Audit Opinions: An Analysis of the Australian Audit Market

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  • PETER J. CAREY
  • MARSHALL A. GEIGER
  • BRENDAN T. O’CONNELL

Abstract

This article examines the potential costs to Australian auditors and their clients from the issuance of first‐time going‐concern‐modified audit opinions. We examine the population of Australian companies receiving a first‐time going‐concern‐modified audit opinion during the period 1994–97 and a matched sample of financially distressed firms receiving a clean audit opinion. Results indicate that auditor switching is positively associated with receipt of a going‐concern‐modified opinion. However, we find no empirical evidence that there is a self‐fulfilling prophecy of increased probability of company failure following the issuance of a going‐concern‐modified opinion for the Australian companies in our study. Our analyses of lost audit fees indicate that auditors issuing first‐time going‐concern‐modified audit opinions lost proportionately more fees by losing clients (through switching or company failure) than firms not issuing a going‐concern‐modified opinion to financially stressed clients.

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  • Peter J. Carey & Marshall A. Geiger & Brendan T. O’Connell, 2008. "Costs Associated With Going‐Concern‐Modified Audit Opinions: An Analysis of the Australian Audit Market," Abacus, Accounting Foundation, University of Sydney, vol. 44(1), pages 61-81, March.
    • Handle: RePEc:bla:abacus:v:44:y:2008:i:1:p:61-81
    DOI: 10.1111/j.1467-6281.2007.00249.x
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    1. Casterella, Jeffrey R. & Johnston, Derek, 2013. "Can the academic literature contribute to the debate over mandatory audit firm rotation?," Research in Accounting Regulation, Elsevier, vol. 25(1), pages 108-116.
    2. Nora Muñoz-Izquierdo & María-del-Mar Camacho-Miñano & María-Jesús Segovia-Vargas & David Pascual-Ezama, 2019. "Is the External Audit Report Useful for Bankruptcy Prediction? Evidence Using Artificial Intelligence," IJFS, MDPI, vol. 7(2), pages 1-23, April.
    3. Ilias G. Basioudis & Evangelos Papakonstantinou & Marshall A. Geiger, 2008. "Audit Fees, Non‐Audit Fees and Auditor Going‐Concern Reporting Decisions in the United Kingdom," Abacus, Accounting Foundation, University of Sydney, vol. 44(3), pages 284-309, September.
    4. Yang Xu & Alicia Liwei Jiang & Neil Fargher & Elizabeth Carson, 2011. "Audit Reports in Australia during the Global Financial Crisis," Australian Accounting Review, CPA Australia, vol. 21(1), pages 22-31, March.
    5. Totok Budisantoso & Rahmawati Rahmawati & Bandi Bandi & Agung Nur Probohudono, 2017. "Audit Opinion Accuracy, Corporate Governance and Downward Auditor Switching: A Study of Association of Southeast Asian Nations Economics Community," International Journal of Economics and Financial Issues, Econjournals, vol. 7(5), pages 530-540.
    6. Sarowar Hossain & Larelle Chapple & Gary S. Monroe, 2018. "Does auditor gender affect issuing going‐concern decisions for financially distressed clients?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(4), pages 1027-1061, December.
    7. Mei Feng & Chan Li, 2014. "Are Auditors Professionally Skeptical? Evidence from Auditors’ Going‐Concern Opinions and Management Earnings Forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 52(5), pages 1061-1085, December.
    8. George Silviu CORDOŞ & Melinda Timea FÜLÖP, 2020. "Debates In The Literature Regarding Audit Reporting," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(22), pages 1-4.
    9. Hu, May & Muhammad, Abdul & Yang, Jingjing, 2022. "Ownership concentration, modified audit opinion, and auditor switch: New evidence and method," The North American Journal of Economics and Finance, Elsevier, vol. 61(C).
    10. Yu, Chun-Chan & Huang, Hua-Wei & Yang, Ya-Chih & Xie, Anxuan, 2022. "Do over-conservative going concern audit opinions exist? Evidence from the prediction model approach," Economics Letters, Elsevier, vol. 212(C).
    11. Elizabeth Carson & Neil Fargher & Yuyu Zhang, 2016. "Trends in Auditor Reporting in Australia: A Synthesis and Opportunities for Research," Australian Accounting Review, CPA Australia, vol. 26(3), pages 226-242, September.
    12. Stuart, Iris & Shin, Yong-Chul & Cram, Donald P. & Karan, Vijay, 2013. "Review of choice-based, matched, and other stratified sample studies in auditing research," Journal of Accounting Literature, Elsevier, vol. 32(1), pages 88-113.
    13. Geiger, Marshall A. & Basioudis, Ilias G. & DeLange, Paul, 2022. "The effect of non-audit fees and industry specialization on the prevalence and accuracy of auditor’s going-concern reporting decisions," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 47(C).

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