Keywords

audit reporting, bankruptcy risk, audit fees, audit report lag

Abstract

This study provides evidence that binary signals in audit reports are unable to fully communicate underlying risks that are inherently continuous in nature. Specifically, we find that companies whose audit reports signal an improvement in internal control effectiveness relative to the prior year are still more likely to subsequently restate the current year’s financial statements than companies with no material weaknesses in either year. Similarly, companies deemed to no longer have substantial doubt of continuing as a going concern are still more likely to declare bankruptcy than companies with no going concern opinion in either year. Results in both settings suggest the presence of residual risk that cannot be communicated through a binary audit report, despite the fact that auditors recognize the risk, as evidenced by higher audit fees and longer audit report lags. Our findings are strongest when the reported improvement is more pronounced, and our results hold in matched samples. Our study provides empirical evidence that supports recent regulatory efforts to improve the content of the audit report and offers suggestions for future research.

Original Publication Citation

"The Loss of Information Associated with Binary Audit Reports: Evidence from Auditors' Internal Control and Going Concern Opinions", Edition 3, Volume 36, Pages 1461-1500, Contemporary Accounting Research, 2019

Document Type

Peer-Reviewed Article

Publication Date

2019

Publisher

Contemporary Accounting Research

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Associate Professor

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