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Changes in the audit environment and auditors' propensity to issue going-concern opinions
Neil Fargher,
Macquarie University
Liwei Jiang, Macquarie University
ABSTRACT. Following a period with high profile corporate collapses, the demise of Arthur Andersen, and high legislative and media scrutiny, we expect that auditors’ reporting decisions would be more conservative. Applying a two-stage modeling technique to identify prospective audit modifications and using data from Australia, we compare auditors’ propensity to issue going-concern opinions before and after the tumultuous period 2000-2002. We find that auditors appear to be more inclined to issue going-concern opinions to financially stressed companies one year after this period. Relatively few bankruptcies are however observed. The increase in going concern modifications resulted in a lower Type II misclassification, but only at the cost of an increase in Type I misclassification, with many more modifications issued to companies that did not go bank
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