Going Concern: the Effects of Sarbanes Oxley Act

Sarene Su Acct 597 First Draft INTRODUCTION BACKGROUND AND HYPOTHESIS Going-Concern Opinions and Bankruptcies Auditors can make two types of misclassification errors regarding going concern Auditor’s Dilemma on the Issuance of Going-Concern Opinions Although SEC and other legislative bodies have provided significant litigation relief to auditors making Type II misclassification errors, the cost of making Type II misclassification can still be quite large (Geiger and Raghunandan).

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In the expense of making Type I misclassification errors, auditors may choose to issue going concern opinion to financially distressed clients to prevent potential litigation costs. In addition, prior literature suggests that when auditors issued modified opinion prior to client bankruptcy, the losses from litigation costs would decrease (Geiger, Raghunandan& Rama).

In contrast, making Type I misclassification errors can cost auditors to lose clients who switch to a different auditor wishing for a more favorable audit opinion (Huadaiband Cooke, 2005). Consequently, the auditors would lose the opportunity to provide the client with audit and non-audit services thus losing future profits from the client. Prior research shows that clients tend to switch H1: Auditors are less likely to make Type I going concern misclassifications after 2002.

H1: Auditors are less likely to make Type II going concern misclassifications after 2002. Hypotheses 1 compare post-2002 Type I misclassification results with pre-2002 results, while Hypotheses 2 compare post-2002 Type II misclassification results with pre-2002 results. I posit that auditors make both types of misclassifications less frequently after the enactment of SOX in 2002. SAMPLE AND DATA RESULTS Audit Opinion Results


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