Research Papers Seminar Auditing
Session 1
Berglund, N.R., J.D. Eshleman, and P. Guo. 2018. Auditor Size and Going Concern
Reporting. AJPT.
What is the research question? What is the intuition/theory behind the research question?
What is the effect of auditor size on issuing a going concern opinion?
- The auditor’s cost of reporting more conservatively is the risk of possible client dismissal
because of false-positive GCO. The cost of losing a single client decreases with the size
of the auditor.
- The auditor’s cost of reporting less conservatively is the risk of litigation and reputation
loss for failing to warn investors of an impending bankruptcy. The expected ligation and
reputation losses increase with the size of the auditor.
- Clients of larger auditors tend to be in better financial condition than clients of smaller
auditors. When not controlling for the financial health of the company a negative
association between auditor size and the likelihood of issuing a GCO is influenced.
Why is this question relevant?
The evidence on this matter is mixed.
An answer to this question may explain influences on issuing the going concern opinion.
How do the authors answer the research question?
Type I error: auditor issues a GCO to a client that subsequently remains viable (cost of client
dismissal)
Type II error: auditor fails to issue a GCO to a client that subsequently fails (cost of
reputation damage and litigation)
H1: Holding clients’ financial condition constant, larger auditors are more likely to issue a
going concern opinion to a distressed client.
H2a: Holding clients’ financial condition constant, larger auditors are not more or less likely
to experience a Type I going concern reporting error.
H2b: Holding clients’ financial condition constant, larger auditors are less likely to experience
a Type II going concern reporting error.
H1:
Regression model, with variable of interest is having a Big 4 auditor or not.
H2a/H2b:
As there may be a self-selection bias in the distribution of the client between Big 4/Non-big
4, the companies are scored based on a propensity-score, which measures client
characteristics. Each non-Big 4 is then matched to a Big 4 based on this score.
Regression model for each hypothesis.
Regression 1: Bankruptcy in 12 months and GCO
Regression 2: GCO and bankruptcy in 12 months
What is the setting/sample?
2000-2013 time period
933 first-time GCOs and 8,334 distressed clients that did not receive a GCO
o Distressed clients = negative operating cash flows and negative net income
No companies that have had GCO in the previous year
Only nonfinancial companies
Smaller group is always matched to larger group
What do they find?
, H1: When holding the clients’ financial condition constants, clients that engage a Big 4
auditor are between 1.69 and 2.48 percent more likely to receive a GCO.
H2a: When holding the clients’ financial condition constants, the coefficients are 3.84
respectively 5.62. The shows that Big 4 auditors have a significantly lower Type I error rate
than non-Big 4 auditors. This indicates that a larger auditor’s ability to accurately predict
subsequent bankruptcy dominates any lessened sensitivity to Type I error.
H2b: When holding the clients’ financial condition constants, the coefficients are 4.89
respectively 2.13. This shows no evidence for H2b.
Kaplan, S. E., G. K. Taylor, and D. D. Williams. 2020. The Effects of the Type and
Content of Audit Reports for Financially Stressed Initial Public Offerings on
Information Uncertainty. AJPT
What is the research question? What is the intuition/theory behind the research question?
What is the relation between an audit report and management disclosures on going concern
on information uncertainty for distressed IPOs?
At the time of an IPO, there is a shortage of publicly available information, which may
increase information uncertainty. Auditors have access to proprietary client information,
which may shape the form and content of the audit report. Audit reports issued can be
particularly useful to IPO investors.
Why is this question relevant?
It examines the effect auditors and management disclosures may have in providing
information during an IPO to the financial markets.
How do the authors answer the research question?
Three types of audit reports: clean report, GCAR with explanatory language about the
client’s going concern status, or a hybrid report that includes explanatory language about the
client’s going concern status but does not communicate “substantial doubt” about the firm’s
ability to continue as a going concern.
Information uncertainty: IPO underpricing, subsequent stock price volatility, and audit report
in year after and whether delisting within two years of the IPO
H1a: IPO firms receiving going concern and hybrid audit reports will be associated with less
information uncertainty than firms receiving clean audit reports.
H1b: IPO firms whose management issues a going concern disclosure will be associated
with less information uncertainty than firms whose management does not issue a going
concern disclosure.
H2: IPO firms receiving audit reports including explanatory language about financial stress
will be associated with less information uncertainty.
Regression analysis separately for market-adjusted return of the first-day underpricing, the
30-day underpricing, or the 30-day stock return volatility on audit report type.
- Underpricing = market-adjusted IPO percentage return calculated as IPO price minus the
closing price of the first day/30 days of trading
- Volatility = standard deviation of daily returns for the first 30 days of trading beginning the
day after the IPO
What is the setting/sample?
- Sample of 450 financially distressed IPOs
- All IPOs are issued after the enactment of the Sarbanes-Oxley Act
- Distressed: negative working capital, net loss and negative cash flow from operations in
the most recent fiscal year-end contained in the prospectus
Session 1
Berglund, N.R., J.D. Eshleman, and P. Guo. 2018. Auditor Size and Going Concern
Reporting. AJPT.
What is the research question? What is the intuition/theory behind the research question?
What is the effect of auditor size on issuing a going concern opinion?
- The auditor’s cost of reporting more conservatively is the risk of possible client dismissal
because of false-positive GCO. The cost of losing a single client decreases with the size
of the auditor.
- The auditor’s cost of reporting less conservatively is the risk of litigation and reputation
loss for failing to warn investors of an impending bankruptcy. The expected ligation and
reputation losses increase with the size of the auditor.
- Clients of larger auditors tend to be in better financial condition than clients of smaller
auditors. When not controlling for the financial health of the company a negative
association between auditor size and the likelihood of issuing a GCO is influenced.
Why is this question relevant?
The evidence on this matter is mixed.
An answer to this question may explain influences on issuing the going concern opinion.
How do the authors answer the research question?
Type I error: auditor issues a GCO to a client that subsequently remains viable (cost of client
dismissal)
Type II error: auditor fails to issue a GCO to a client that subsequently fails (cost of
reputation damage and litigation)
H1: Holding clients’ financial condition constant, larger auditors are more likely to issue a
going concern opinion to a distressed client.
H2a: Holding clients’ financial condition constant, larger auditors are not more or less likely
to experience a Type I going concern reporting error.
H2b: Holding clients’ financial condition constant, larger auditors are less likely to experience
a Type II going concern reporting error.
H1:
Regression model, with variable of interest is having a Big 4 auditor or not.
H2a/H2b:
As there may be a self-selection bias in the distribution of the client between Big 4/Non-big
4, the companies are scored based on a propensity-score, which measures client
characteristics. Each non-Big 4 is then matched to a Big 4 based on this score.
Regression model for each hypothesis.
Regression 1: Bankruptcy in 12 months and GCO
Regression 2: GCO and bankruptcy in 12 months
What is the setting/sample?
2000-2013 time period
933 first-time GCOs and 8,334 distressed clients that did not receive a GCO
o Distressed clients = negative operating cash flows and negative net income
No companies that have had GCO in the previous year
Only nonfinancial companies
Smaller group is always matched to larger group
What do they find?
, H1: When holding the clients’ financial condition constants, clients that engage a Big 4
auditor are between 1.69 and 2.48 percent more likely to receive a GCO.
H2a: When holding the clients’ financial condition constants, the coefficients are 3.84
respectively 5.62. The shows that Big 4 auditors have a significantly lower Type I error rate
than non-Big 4 auditors. This indicates that a larger auditor’s ability to accurately predict
subsequent bankruptcy dominates any lessened sensitivity to Type I error.
H2b: When holding the clients’ financial condition constants, the coefficients are 4.89
respectively 2.13. This shows no evidence for H2b.
Kaplan, S. E., G. K. Taylor, and D. D. Williams. 2020. The Effects of the Type and
Content of Audit Reports for Financially Stressed Initial Public Offerings on
Information Uncertainty. AJPT
What is the research question? What is the intuition/theory behind the research question?
What is the relation between an audit report and management disclosures on going concern
on information uncertainty for distressed IPOs?
At the time of an IPO, there is a shortage of publicly available information, which may
increase information uncertainty. Auditors have access to proprietary client information,
which may shape the form and content of the audit report. Audit reports issued can be
particularly useful to IPO investors.
Why is this question relevant?
It examines the effect auditors and management disclosures may have in providing
information during an IPO to the financial markets.
How do the authors answer the research question?
Three types of audit reports: clean report, GCAR with explanatory language about the
client’s going concern status, or a hybrid report that includes explanatory language about the
client’s going concern status but does not communicate “substantial doubt” about the firm’s
ability to continue as a going concern.
Information uncertainty: IPO underpricing, subsequent stock price volatility, and audit report
in year after and whether delisting within two years of the IPO
H1a: IPO firms receiving going concern and hybrid audit reports will be associated with less
information uncertainty than firms receiving clean audit reports.
H1b: IPO firms whose management issues a going concern disclosure will be associated
with less information uncertainty than firms whose management does not issue a going
concern disclosure.
H2: IPO firms receiving audit reports including explanatory language about financial stress
will be associated with less information uncertainty.
Regression analysis separately for market-adjusted return of the first-day underpricing, the
30-day underpricing, or the 30-day stock return volatility on audit report type.
- Underpricing = market-adjusted IPO percentage return calculated as IPO price minus the
closing price of the first day/30 days of trading
- Volatility = standard deviation of daily returns for the first 30 days of trading beginning the
day after the IPO
What is the setting/sample?
- Sample of 450 financially distressed IPOs
- All IPOs are issued after the enactment of the Sarbanes-Oxley Act
- Distressed: negative working capital, net loss and negative cash flow from operations in
the most recent fiscal year-end contained in the prospectus
