Consistency in audit reporting behaviour: evidence from going concern modifications

Abstract

Without consistency in auditors' reporting behaviour, it is very difficult for a user of audit reports to determine where differences come from; economic differences, differences in auditing methods, interpretation of standards or even due to the auditors' independence. This thesis examines the consistency in auditors’ reporting behaviour with two empirical studies.

The first study investigates the cross-country consistency in the application of auditing standards over time and across different auditing firms in the United States, United Kingdom and Australia. With a sample of 19,157 financially distressed firms from 2001 to 2006, the study finds that there is a lack of consistency in audit reporting behaviour between these countries when it comes to the going concern modification. The lack of consistency is however moderated by international audit firm networks, and the trend is that the country differences have reduced over time.

The second study looks at the auditors' consistency by comparing their substantial doubt threshold when first issuing a going concern modification, with their substantial doubt threshold when they withdraw the going concern modification. With panel data from 386 US firms in the years 2000-2008, auditors are found to be inconsistent in their assessment of the substantial doubt criterion. The ceteris paribus probability of observing a going concern modification is 6.9% lower when the going concern modification was first issued, compared to when it was withdrawn. The study finds that this difference is primarily caused by the firms that change auditors between the issuance and the withdrawal of the going concern modification. This implies that given the same auditing standard, different audit firms arrive at inconsistent audit outcomes.

Understanding the role and relationship between the various impediments and facilitators to consistency both at a national and international level is of importance to consumers and providers of audit services, as well as those who regulate the audit market. By providing a systematic investigation into the consistency of the audit outcome, the findings of this thesis provides valuable input to the evaluation of the current auditing standards and may serve as a guide to future developments of these standards. The thesis also examines the audit firms’ network structure and its ability to facilitate consistency across borders.