Going-concern Uncertainties in Pre-bankrupt Audit Reports: New Evidence Regarding Discretionary Accruals and Wording Ambiguity

This paper extends the traditional view of audit failures related to the going-concern (GC) assumption to two circumstances scarcely analyzed in the audit literature: the earnings overstatement that characterizes firms without a going-concern uncertainty (GCU) in their audit reports and the wording used by auditors in the GC qualifications. We find significant differences between the discretionary accruals of Spanish GC and non-GC companies. After discounting their effect, the client's financial condition loses its significance in the multivariate explanation of the GCU and auditor size is the variable that better explains the qualifications. We also find that a large percentage of GCUs are written ambiguously and with an overuse of conditional language, but no client or auditor attributes significantly explain differences in the GCU wording. Our results support the need to strengthen the enforcement mechanisms, as a GC audit Standard is not, by itself, enough to efficiently control auditor behaviour.