Why Does an Auditor Not Issue a Going Concern Opinion for a Failing Company? Impact of Financial Risk, Time to Bankruptcy, and Cognitive Style

This study investigates the effects of client’s financial risk, time to bankruptcy, and auditor’s cognitive style on issuing a Going Concern Opinion (GCO) for failing companies. Empirical tests are based on financial data from 328 bankrupt firms and peer review data from 172 auditors. Cognitive style on an intuitive-analytic dimension is approximated by the degree of auditor’s compliance with the ISA standards for analytic procedures in peer review. Empirical findings support research hypotheses and show that seriousness of the financial risk and time distance to bankruptcy are important determinants of GC judgment accuracy. They also show that the performance of the cognitive style of the auditor is related to the fit between the cognitive style and the characteristics of the GC situation. The results indicate that an auditor’s individual characteristics, i.e. cognitive style, affect his/her decision making when issuing GCO. This study is the first approach that systematically investigates the relationship between financial risk, distance to bankruptcy, and cognitive style on GC judgment in an archival research.