An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Zemin Lu
(None)

Abstract: This paper investigates the efficiency aspect of the practice prescribed by SAS 59 of having auditors evaluate firms’ going-concern status. A model is developed for the purpose, which captures such features of the practice as that the auditor’s going-concern opinion may be a self-fulfilling prophecy. The analysis shows that the auditor can always discharge the responsibility in such a manner as to improve efficiency so long as he has any information useful for the prediction of business failure. The analysis also shows, about the auditor’s optimal decision as to when to make the going-concern modification, that the firm owners should want to heed the modification and take certain actions on receiving it, that the modification should be made less frequently if the auditor has less information useful for the decision, and that greater efficiency gains can be achieved by the practice if the auditor has more such information.

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