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- Title
STRATEGIC AUDITOR BEHAVIOUR AND GOING-CONCERN DECISIONS.
- Authors
Matsumura, Ella Mae; Subramanyam, K.R.; Tucker, Robert R.
- Abstract
The article analyses a game-theoretic model in which a client can potentially avoid a going-concern opinion and its self-fulfilling prophecy by switching auditors. The going-concern opinion has long been a subject of controversy and debate in professional circles both in Great Britain and the U.S. In the U.S., the attention focused on this opinion has intensified due to political pressure and to a dramatic increase in auditors' legal costs resulting from reporting on a client's going-concern status. While considerable empirical work exists in this area, little theoretical analysis directly addresses the going concern issue. There is a need to examine this issue from a theoretical viewpoint, to understand better the nature of the problem and the effect of essential variables. This study presents a game-theoretic analysis permitting a flexible yet precise analysis of this difficult decision. Controversy has arisen over the value of the going concern opinion, the appropriateness and prudence of auditors making predictions, and the high Type I and Type II error rates for going concern reports. These controversial issues have inspired many empirical or experimental studies. While there is still conflicting evidence on whether going concern opinions have information content or whether going concern opinions are predictable, the evidence relating to the accuracy of the going concern opinions is more pervasive.
- Subjects
UNITED Kingdom; UNITED States; AUDITING; GAME-theoretical semantics; SOCIAL psychology; GOING concern (Accounting); ERRORS
- Publication
Journal of Business Finance & Accounting, 1997, Vol 24, Issue 6, p727
- ISSN
0306-686X
- Publication type
Article
- DOI
10.1111/1468-5957.00131