ABSTRACT In this study, we examine the proposition that the auditor's going-concern modif... more ABSTRACT In this study, we examine the proposition that the auditor's going-concern modified opinion is a valuable risk communication to the equity market that results in a shift of the market's perception of financially distressed firms. Specifically, our analyses reveal that the market valuation is significantly altered from a focus on both the income statement and balance sheet to a balance sheet-only focus in the year a company receives a first-time going-concern modified opinion. These results hold even after controlling for several common measures of financial distress and when examining a larger control sample of distressed firms. We also document that the market devalues a company's inventory and places increased weight on cash, receivables, and long-term assets and liabilities as a result of the auditor's modification. This indicates that the going-concern modification provides incremental information specifically related to abandonment or adaptation risk. Our results provide evidence that the market interprets the going-concern modified audit opinion as an important communication of risk that results in a substantial shift in the structure of the market valuation for distressed firms.
Prior research on market reaction to going-concern modifications indicates that unanticipated mod... more Prior research on market reaction to going-concern modifications indicates that unanticipated modifications produce no similar reaction. This paper uses previously proposed measures of market expectat.
In this study we examine the association between audit service fees and non-audit service (NAS) f... more In this study we examine the association between audit service fees and non-audit service (NAS) fees and the auditor's final decision regarding the type of opinion to render to a financially distressed client. Along with examining current fee levels and reporting decisions we also test the DeAngelo (1981) auditor independence model by examining the association between future fee receipts and current reporting decisions. Using data from the post-SOX reporting period of 2004-2006 and a stringent control sample, we find that the magnitude of NAS fees received in the current year is negatively related to the likelihood of the auditor modifying the audit opinion for going-concern uncertainty. We also find that current going-concern modification decisions are negatively related to total fees received by auditors in subsequent years. Our findings suggest that concerns over the relation between auditor fees and the possible impairment of auditor independence, as reflected in going-concern modification decisions, are supported in the more recent years for highly distressed clients.
ABSTRACT In this study, we examine the proposition that the auditor's going-concern modif... more ABSTRACT In this study, we examine the proposition that the auditor's going-concern modified opinion is a valuable risk communication to the equity market that results in a shift of the market's perception of financially distressed firms. Specifically, our analyses reveal that the market valuation is significantly altered from a focus on both the income statement and balance sheet to a balance sheet-only focus in the year a company receives a first-time going-concern modified opinion. These results hold even after controlling for several common measures of financial distress and when examining a larger control sample of distressed firms. We also document that the market devalues a company's inventory and places increased weight on cash, receivables, and long-term assets and liabilities as a result of the auditor's modification. This indicates that the going-concern modification provides incremental information specifically related to abandonment or adaptation risk. Our results provide evidence that the market interprets the going-concern modified audit opinion as an important communication of risk that results in a substantial shift in the structure of the market valuation for distressed firms.
Prior research on market reaction to going-concern modifications indicates that unanticipated mod... more Prior research on market reaction to going-concern modifications indicates that unanticipated modifications produce no similar reaction. This paper uses previously proposed measures of market expectat.
In this study we examine the association between audit service fees and non-audit service (NAS) f... more In this study we examine the association between audit service fees and non-audit service (NAS) fees and the auditor's final decision regarding the type of opinion to render to a financially distressed client. Along with examining current fee levels and reporting decisions we also test the DeAngelo (1981) auditor independence model by examining the association between future fee receipts and current reporting decisions. Using data from the post-SOX reporting period of 2004-2006 and a stringent control sample, we find that the magnitude of NAS fees received in the current year is negatively related to the likelihood of the auditor modifying the audit opinion for going-concern uncertainty. We also find that current going-concern modification decisions are negatively related to total fees received by auditors in subsequent years. Our findings suggest that concerns over the relation between auditor fees and the possible impairment of auditor independence, as reflected in going-concern modification decisions, are supported in the more recent years for highly distressed clients.
Uploads
Papers by Allen Blay