There's No Place Like Home: The Influence of Home-State Going-Concern Reporting Rates on Going-Concern Opinion Propensity and Accuracy

Abstract

SUMMARY Prior research has had success identifying client financial characteristics that influence auditors' going-concern reporting decisions. In contrast, relatively little research has addressed whether auditors' circumstances and surroundings influence their propensities to issue modified opinions. We investigate whether auditors' decisions to issue GC opinions are affected by the rate of GC opinions being given in their proximate area. Controlling for factors that prior research associates with going-concern opinions and state-level economics, we find that non-Big 4 auditors located in states with relatively high first-time going-concern rates in the prior year are up to 6 percent more likely to issue first-time going-concern opinions. The results from our state-based GC measure casts doubt that this increased propensity is explained by economic factors and suggests that psychological factors may explain this behavior among auditors. Interestingly, this higher propensity increases auditors' Type I error rates without decreasing their Type II error rates, further suggesting economics alone do not explain these results. Such evidence challenges the generally accepted notion that a higher propensity to issue a going-concern opinion always reflects higher audit quality. JEL Classifications: M41; M42. Data Availability: All data are available from public sources.