Are Auditors Professionally Skeptical? Evidence from Auditors’ Going-Concern Opinions and Management Earnings Forecasts

Posted: 5 Oct 2014

See all articles by Mei Feng

Mei Feng

University of Pittsburgh - Katz Graduate School of Business

Chan Li

University of Kansas

Multiple version iconThere are 2 versions of this paper

Date Written: October 3, 2014

Abstract

We examine whether auditors exercise professional skepticism about management earnings forecasts when making going-concern decisions. Using publicly issued management earnings forecasts as a proxy for earnings forecasts provided by managers to auditors, we find that management earnings forecasts are negatively associated with both auditors’ going-concern opinions and subsequent bankruptcy. The weight auditors put on management forecasts in the going-concern decision is not significantly different from the weight implied in the bankruptcy prediction model. Moreover, compared with the bankruptcy model, auditors assign a lower weight to management forecasts they perceive as being less credible, including those (1) issued by managers who issued optimistic forecasts in the previous two years, and (2) predicting high earnings increases or high earnings. Taken together, our evidence is consistent with auditors being professionally skeptical about management earnings forecasts when making going-concern decisions.

Keywords: professional skepticism, management forecast, going-concern

JEL Classification: M41

Suggested Citation

Feng, Mei and Li, Chan, Are Auditors Professionally Skeptical? Evidence from Auditors’ Going-Concern Opinions and Management Earnings Forecasts (October 3, 2014). Journal of Accounting Research, Vol. 52, No. 5, 2014, Available at SSRN: https://ssrn.com/abstract=2505058

Mei Feng

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Chan Li (Contact Author)

University of Kansas ( email )

Capitol Federal Hall
Lawrence, KS 66045
United States
7857661277 (Phone)
66045 (Fax)

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