March 25, 2012
Foster & Ward on Going Concern Evaluations after SOX
Are Auditors' Going-Concern Evaluations More Useful after SOX?, by Benjamin P. Foster, University of Louisville - College of Business and Public Administration, and Terry J. Ward, Middle Tennessee State University, was recently posted on SSRN. Here is the abstract:
Bankruptcy risk is a crucial factor in auditors’ decisions whether or not to modify their audit opinion based on the going-concern assumption. SOX required more extensive audit procedures than those required before its passage. More extensive audit procedures should result in more meaningful audit reports. This study examines whether the auditors’ going-concern opinion provides more useful incremental information after SOX than before SOX in distinguishing between distressed companies that become bankrupt in the next year and those that do not. We find that an audit opinion variable adds more useful information to bankruptcy prediction models after SOX than before SOX. Our findings provide evidence that financial statement users have derived benefits from the costly procedures required under SOX.
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