Regulatory Sanction Risk and Going-Concern Reporting Practices: Evidence for Privately Held Firms
Journal article, Peer reviewed
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- Scientific articles 
Original versionAccounting and Business Research. 2021, . 10.1080/00014788.2021.1931799
We study the temporal evolution of going-concern reporting from 2004 to 2013 and test whether sanction risk is related to the likelihood of a going-concern opinion using samples of privately held firms. In 2009, the Supervisory Board of Public Accountants (SBPA) in Sweden started to issue significantly more going-concern-related disciplinary sanctions, and we test whether and how auditors at different audit firms adjust their reporting practices (Type I and Type II errors) in response to the increased sanction risk. Our findings reveal that auditors are more likely to issue going-concern opinions to bankrupt and non-bankrupt firms when the sanction risk is higher, suggesting that sanction risk is positively associated with conservatism in auditors’ reporting. Furthermore, we find that auditors at Big 4 firms alter their reporting to conservative more than non-Top 7 firms when sanction risk increases. Finally, results on the informativeness of going-concern opinions indicate that a going-concern opinion increases the bankruptcy probability during both the lower and higher sanction risk periods, but the impact is higher under the higher sanction risk period.