Going concern assumtion in a Swedish context -do auditors change their propensity to issue a going concern opinion in different stages of the business cycle?

Abstract

Background To begin with, there has been a persistent public criticism of auditors in accounting scandals and of particular concern is their inability to forewarn the public of business failures, that is, no going concern opinion has been issued in the audit report. The implication here is that without having received a going concern opinion companies are filing for bankruptcy. Further, there is an uncertainty of how auditors should respond to a recession, as an economic downturn puts an extra pressure on a company’s ability to remain in business. Lastly, there is an on-going debate regarding the Big Four audit firms’ merits: client firms appear to feel more comforted by choosing one of the Big Four audit firms and the discussion regards whether this is related to their actual merits or if it is just a perception of them being the best. Aim of study The overall aim of this thesis is to investigate whether Swedish limited liability companies that have filed for bankruptcy received a going concern opinion in the audit reports in the year prior to bankruptcy and whether it varies with the business cycle, that is, between the years 2007 and 2009. We also examine if there is any material difference in the propensity to issue a going concern opinion between the Big Four audit firms and other smaller audit firms. Finally, we study the relationship between the number of predicted bankruptcies by financial models and the issuance of going concern opinions in order to get a perception of whether relatively more going concern opinion could have been issued when considering financial ratios. Research design In order to achieve our aim we are using three hypotheses based on the thesis’ theoretical framework. This study has a statistical approach and we examine the first two hypotheses by collecting financial statements and reviewing the related audit reports for 747 companies. The third hypothesis is tested by calculating financial ratios based on the companies’ accounting information. Control variables have been used to examine other factors’ impact on our results. Conclusions Findings show that relatively more going concern opinions are issued in a recession compared to a boom, but not significantly more. It also appears that no evidence is to be found that larger audit firms provide significantly higher audit quality. Yet, there is a tendency of relatively more going concern opinions being issued during an impending recession by auditors from one of the Big Four audit firms or given financial distress. The results also show that financial models are more effective than auditors in predicting future bankruptcies.