TITLE:
Why Does an Auditor Not Issue a Going Concern Opinion for a Failing Company? Impact of Financial Risk, Time to Bankruptcy, and Cognitive Style
AUTHORS:
Erkki K. Laitinen, Teija Laitinen
KEYWORDS:
Going Concern Opinion, Failing Firms, Financial Risk, Time to Bankruptcy, Cognitive Style, Finnish Small Firms
JOURNAL NAME:
Theoretical Economics Letters,
Vol.10 No.1,
February
18,
2020
ABSTRACT: This study investigates the effects of client’s
financial risk, time to bankruptcy, and auditor’s cognitive style on issuing a
Going Concern Opinion (GCO) for failing companies. Empirical tests are based on
financial data from 328 bankrupt firms and peer review data from 172 auditors.
Cognitive style on an intuitive-analytic
dimension is approximated by the degree of auditor’s compliance with the ISA
standards for analytic procedures in peer review. Empirical findings support
research hypotheses and show that seriousness of the financial risk and time
distance to bankruptcy are important determinants of GC judgment accuracy. They
also show that the performance of the cognitive style of the auditor is related
to the fit between the cognitive style and the characteristics of the GC
situation. The results indicate that an auditor’s individual characteristics, i.e. cognitive style, affect his/her
decision making when issuing GCO. This study is the first approach that
systematically investigates the relationship between financial risk, distance
to bankruptcy, and cognitive style on GC judgment in an archival research.