Accounting Research Journal

The effect of financial crisis on auditor conservatism: US evidence

Joseph Beams Yun-Chia Yan
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ARJ
28,2
The effect of financial crisis on
auditor conservatism:
US evidence
160 Joseph Beams
Department of Accounting, University of New Orleans, New Orleans,
Received 21 June 2013
Revised 16 May 2014 Louisiana, USA, and
Accepted 5 June 2014
Yun-Chia Yan
Department of Accounting and MIS, University of Texas at Brownsville,
Brownsville, Texas, USA

Abstract
Accounting Research Journal 2015.28:160-171.

Purpose – This paper aims to examine the effect that the recent financial crisis had on auditor
conservatism in the form of increased going-concern opinions.
Design/methodology/approach – This study uses a sample of US’ distressed firms from 2005 to
2011 to test the change in going-concern opinions issued. This paper uses a logistic regression model to
control for other predictors of going-concern opinions to determine when the financial crisis led to an
increase in auditor conservatism.
Findings – The authors find that auditors became more conservative in the form of issuing higher
levels of going-concern opinions even after controlling for other predictors of going-concern opinions.
This increased conservatism was present in both Big 4 and non-Big 4 accounting firms. The increased
conservatism quickly returned to normal levels when the financial crisis eased.
Originality/value – These findings add to the literature on the effects of environmental changes on
audit opinions. Additionally, this study finds a difference in the timing of the reaction by large and small
accounting firms, but, overall, it finds consistency in that both increased conservatism during the crisis
and quickly returned to normal afterward.
Keywords Conservatism, Financial crisis, Auditor, Going-concern
Paper type Research paper

1. Introduction
The recent financial crisis and recession had a devastating effect on families and
businesses around the world. The survival of many businesses was threatened by slow
sales and tight lending. According to The National Bureau of Economic Research (2010),
the recent recession in the USA officially started in December 2007 and ended in June of
2009. It lasted 18 months which makes it the longest US recession in more than 60 years.
Although the recession officially ended in June 2009, many areas of the economy showed
little recovery in that year.
Accounting Research Journal
The exact time that a recession starts or ends is not known at the time it happens.
Vol. 28 No. 2, 2015
pp. 160-171
There are usually some signs that business is slowing down, followed by speculation
© Emerald Group Publishing Limited that a country may be falling into a recessionary time, but the official beginning and
1030-9616
DOI 10.1108/ARJ-06-2013-0033 ending must be calculated after the fact, once data can be collected and analyzed.
 Some companies could not survive the economic downturn and were either taken Financial
over by other companies or fell into bankruptcy. When an auditor foresees a high crisis on
likelihood of bankruptcy, he gives the company a going-concern modified audit opinion.
It does not matter if the higher likelihood of bankruptcy is the result of an economic
auditor
downturn or more firm-specific factors. Previous studies have suggested that auditors conservatism
may get overly cautious during times of heightened public scrutiny.
This study looks at the effects of the recent financial crisis on auditors’ going-concern 161
audit opinions. We find that not only did the number of distressed companies and the
number of going-concern opinions increase during the financial crisis but also auditors
became more conservative toward distressed companies in the form of issuing a higher
percentage of going-concern opinions to those companies. Even for the same level of
financial ratios and bankruptcy predictors, auditors increased their likelihood of issuing
going-concern opinions. This increased conservatism was very evident in 2008, but the
level of conservatism had returned to normal by 2010.
The remainder of this paper is organized as follows. Section 2 provides a review of
prior literature and the development of research questions. Section 3 describes the
sample and the methodology used to test these questions. The results of the tests are
Accounting Research Journal 2015.28:160-171.

presented in section 4, and section 5 provides a conclusion.

2. Prior literature and hypothesis development

Prior studies have looked at the causes of going-concern modified audit opinions.
According to Statement on Auditing Standards No. 59 (AICPA, 1988):
The auditor has a responsibility to evaluate whether there is substantial doubt about the
entity’s ability to continue as a going concern for a reasonable period of time, not to exceed one
year beyond the date of the financial statements being audited […].
However, under international standards, the time period to be considered for a
going-concern modification must be a minimum of 12 months rather than the “not to
exceed one year” required by the US standard (Carson et al., 2013).
If the auditors perceive a high likelihood of firm failure, they issue a going-concern
modified audit opinion. An auditor’s doubt about a firm’s ability to continue must
include all relevant factors. The auditor considers both the firm and the environment, as
well as management’s plans to overcome its expected difficulties.
The going-concern modified audit opinion is intended to warn users of financial
statements of the risks that a company is facing. A company receiving a going-concern
modified audit opinion can have difficulty raising capital from new investors or
creditors. This limitation on the availability of capital can make a company’s failure
even more likely. Receiving a going-concern opinion can anger the company’s
management and may create hardship that would otherwise not have existed. When
auditors issue a going-concern modified audit opinion, their clients are more likely to
switch to another audit firm (Lennox, 2000; Carcello and Neal, 2003; Carey et al., 2008;
Carson et al., 2013). This provides an incentive for the audit firm to resist issuing a
going-concern opinion. The decision to give a company a going-concern opinion is not
taken lightly.
However, investors are less surprised by a firm’s bankruptcy if the firm has received
a going-concern opinion first (Chen and Church, 1996). Feldmann and Read (2010) find
that over 40 per cent of the firms that file bankruptcy do not receive a going-concern
 ARJ modified audit opinion prior to filing bankruptcy. Not issuing a going-concern modified
28,2 opinion can lead to litigation against the auditors. Auditors must weigh the risks of
assigning a going-concern audit opinion too early and possibly losing a client’s business
against the risk of a client going bankrupt and the audit firm facing litigation because
they did not provide a warning to the public in the form of a going-concern modified
audit opinion.
162 During times of recession, all companies have a harder time surviving. The banking
crisis that accompanied the 2007 recession left many banks applying much tighter
lending requirements. In an environment of declining sales, many companies needed
additional financing; however, banks were reluctant to lend to all but the strongest
customers. That left some companies without the necessary cash they needed to survive.
These factors affect an entitie’s ability to survive and must be considered by auditors
when accessing whether to issue a going-concern modified audit opinion.
An increased likelihood of company failures during the recession period could be due
to greater difficulty of obtaining financing during this period. While the strongest
clients could still obtain financing, less stable companies often could not. Auditors
Accounting Research Journal 2015.28:160-171.

consider the ability of the audit client to obtain financing as part of the going-concern
assessment. Prior research has found that future financing reduces the probability of
receiving a going-concern audit opinion (Defond et al., 2002; Mutchler et al., 1997).
Auditors must consider all relevant factors when assessing a going-concern modified
audit opinion. Bankruptcy prediction models have been developed for use in predicting
the likelihood of a company declaring bankruptcy. As a going-concern opinion is
intended to warn of a high likelihood of a firm failure, the use of these bankruptcy
prediction models has been tested for their correlation with going-concern audit
opinions. One of these models uses a Z-score to measure the degree of a company’s
financial distress and the likelihood of bankruptcy (Zmijewski, 1984). The Z-score uses
a combination of return on assets, financial leverage and liquidity. The Z-score has been
found to be positively associated with receiving a going-concern audit opinion (Carcello
and Neal, 2000).

2.1 Changes in conservatism

The audit opinion is an opinion and therefore has a degree of subjectivity to it. Prior
studies have found that auditor conservatism changes resulting from changes in the
auditing environment (Geiger and Raghunandan, 2002; Geiger et al., 2005; Fargher and
Jiang, 2008; Feldmann and Read, 2010).
Geiger and Raghunandan (2002) find that reduced legal pressure because of changes
in laws during the 1990s led to a lower incidence of going-concern opinions for
distressed firms in the late 1990s. Geiger et al. (2005) find that auditors were more likely
to issue going-concern opinions after December 2001 than previously due to the changes
in attitudes resulting from publicity from major corporate scandals and the passage of
the Sarbanes–Oxley Act.
Fargher and Jiang (2008) also find that auditors were more likely to issue
going-concern opinions after 2002 than in the prior period. They find that the auditors’
increased conservatism led not only to a small decrease in the level of company failures
that were not preceded by going-concern audit opinions but also to an increase in
going-concern opinions for companies that did not fail.
 Feldmann and Read (2010) find that going-concern modified opinions increased after Financial
2002 and led to a lower incidence of bankrupt firms that did not receive a going-concern crisis on
opinion previously. However, they also find that the change was only temporary and the
conservatism soon returned to normal levels.
auditor
When the economy slows significantly, businesses face additional challenges. The conservatism
number of going-concern opinions is expected to increase because the number of
bankruptcies also increases. The number of distressed companies increased during the 163
2007-2009 financial crisis and therefore, we expect auditors to have increased the
number of going-concern opinions during the same period. However, do audit firms
increase their conservatism or even overcompensate during these times? This study
attempts to answer the following research questions:
RQ1. Did the relative proportion of going-concern opinions for distressed
companies increase during the financial crisis?
RQ2. After controlling for other predictors of going-concern opinions, did the
relative likelihood of receiving a going-concern opinion increase during the
financial crisis?
Accounting Research Journal 2015.28:160-171.

3. Sample and methodology

3.1 Sample selection
Consistent with prior going-concern studies (Carcello and Neal, 2000; Geiger and
Raghunandan, 2002; Geiger et al., 2005; Feldmann and Read, 2010), we create a sample
of all financially distressed US firms listed on Compustat for the years 2005-2011. We
define financially distressed firms as those with negative earnings or negative operating
cash flows as defined in DeFond et al. (2002). We remove companies in the financial
industries (SIC: 60-69) due to their unique reporting requirements. Firms with a prior
year going-concern opinion are inherently more likely to have a current year
going-concern opinion. Therefore, consistent with prior studies (DeFond et al., 2002; Li,
2009), we ensure that only first-time going-concern opinions are included by removing
firms that had a prior year going-concern opinion. The resulting sample has 9,240
firm-year observations. Consistent with prior research, we winsorize the continuous
variables used in the analysis at the 1 and 99 per cent levels.

3.2 Methodology
To test RQ1, we separate the firms by year to look at the number of distressed firms and
the level of going-concern opinions per year. We examine the percentage of
going-concern opinions between the years and conduct a t-test on the pre-crisis years
versus the crisis years. We define the pre-crisis years as 2005-2006 and the crisis years
as 2008-2009. The recession officially started at the end of 2007, so we do not include
2007 with either group.
We next separate the firms into two groups based on whether they had a Big 4
accounting firm conduct their external audit. This allows us to examine how the level of
going-concern opinions for each group changed during and after the financial crisis.
To test whether auditors became more conservative during the financial crisis, we
use a logistic regression model. The dependent variable in the model is a dichotomous
variable that represents the audit opinion. The audit opinion is either a going-concern
opinion or not a going-concern opinion. The variable of interest is CRISIS. The CRISIS
 ARJ variable is coded as a 1 if the observation was from the 2008-2009 crisis years and is
28,2 coded 0 for all other years. We expect the crisis years to have a higher incidence of
going-concern opinions, and therefore, we predict the CRISIS variable will be positive
and significant.
Observations from the 2005-2006 pre-crisis period are compared to the crisis and
post-crisis periods. The post-crisis years are defined as 2010-2011. The POSTCRISIS
164 variable is either a 0 or 1 depending on whether the observation is from the 2010-2011
post-crisis years. We do not predict a significant difference between this period and the
pre-crisis period. Because the recession started in 2007, the year 2007 is not included in
either group, and therefore, the 2007 observations are omitted from the final analysis.
Also, firms that did not contain the variables for the analysis were omitted. This resulted
in a sample of 7,210 firm-year observations for the regression analysis.
Because the bankruptcy prediction model Z-score (Zmijewski, 1984) correlates with
going-concern modified audit opinions, we include a variable to measure Z-score in the
model (Carcello and Neal, 2000).
We also include an interaction term in the model for the interaction of Z-score with the
Accounting Research Journal 2015.28:160-171.

crisis period. In the non-crisis years, this interaction term will have the value of 0, as the
CRISIS variable will be zero. During the crisis years, it will be identical to Z-score.
Therefore, this variable will indicate whether auditors weigh the variables included in
the Z-score more or less heavily during the crisis years than other years.

3.3 Going-concern control variables

Due to the increased difficulty in obtaining loans during the crisis period, we control for
a firm’s ability to obtain external financing. Consistent with prior research, we control
for this by including a variable for future financing which represents whether the firm
had a new issuance of equity or debt over the subsequent fiscal year (Defond et al., 2002;
Mutchler et al., 1997).
Previous research on going-concern opinions have found a variety of firm-specific
variables associated with a higher likelihood of receiving a going-concern audit opinion.
Prior research has found that going-concern opinions are associated with longer audit
reporting delays (Raghunandan and Rama, 1995; Carcello et al., 1996; Ettredge et al.,
2006). To control for this relationship, we include a variable to measure the days from
the fiscal year-end to the date of the audit report.
Generally, smaller firms have been found to have a higher likelihood of receiving a
going-concern audit opinion (Carcello and Neal, 2000; Behn et al., 2001; Geiger et al.,
2005; Knechel and Vanstraelen, 2007; Feldmann and Read, 2010). One-year stock market
return and liquid investments have been found to be negatively associated with
receiving a going-concern opinion. Higher stock volatility and leverage (defined as total
liabilities divided by total assets) have been found to be positively associated with
going-concern opinions (DeFond et al., 2002). Different industries can also have an effect
on going-concern opinions (Krishnan, 2005).
The size of an audit firm has been tested for a relationship to going-concern audit
opinions. The results have been mixed. Some have suggested that Big 4 audit firms are
more likely to issue a going-concern audit opinion. The size of audit firms is usually
separated into two groups, Big 4 and non-Big 4. Behn et al. (2001) found a positive
relationship between Big 4 audit firms and going-concern opinions. Other researchers
 (Geiger et al., 2005; Feldmann and Read, 2010; Knechel and Vanstraelen, 2007) have not Financial
found such a relationship. crisis on
We include all of these variables from the prior research to control for other factors
impacting going-concern opinions. The following model is used to test RQ2 :
auditor
conservatism
GC ⫽ ␤0 ⫹ ␤1 * CRISIS ⫹ ␤2 * POSTCRISIS ⫹ ␤3 * Z * CRISIS
⫹ ␤4 * LNTA ⫹ ␤5 * Z ⫺ SCORE ⫹ ␤6 * BIG4 ⫹ ␤7 * VOLATILITY 165
⫹ ␤8 * RETURN ⫹ ␤9 * INVESTMENTS ⫹ ␤10 *LEV
⫹ ␤11 * AUDELAY ⫹ ␤12 * FUTUREFINANCE ⫹ ␤13 * IND ⫹ ␧

Where:
GC ⫽ going concern, 1 if audit opinion is first-time going concern,
0 otherwise;
CRISIS ⫽ 1 if crisis period (2008 and 2009), else 0;
Postcrisis ⫽ 1 if post-crisis period (2010 and 2011), else 0;
Accounting Research Journal 2015.28:160-171.

Z * CRISIS ⫽ Interaction term for Z-SCORE and CRISIS;

LNTA ⫽ Natural log of total assets (in millions of dollars);
Z-SCORE ⫽ Z-score from Zmijewski’s (1984) model;
BIG4 ⫽ indicator variable that takes a value of 1 if audited by a Big
4 accounting firm, otherwise zero;
VOLATILITY ⫽ standard deviation of annual stock returns in recent three
years;
RETURN ⫽ one-year common stock return;
INVESTMENTS ⫽ short- and long-term investment securities (including cash
and cash equivalents) deflated by total assets (TA);
LEV ⫽ total liabilities over total assets;
AUDELAY ⫽ the number of calendar days from fiscal year-end to the date
of the auditor’s report;
FUTUREFINANCE ⫽ an indicator variable that takes the value of 1 if the firm has
a new issuance of equity or debt over the subsequent fiscal
year; and
IND ⫽ industry dummy variables as defined in Krishnan (2005).

4. Results
The data in our sample include all non-financial distressed companies in the sample
years. Distressed companies are defined as having either negative earnings or negative
cash flows. Table I shows the total number of distressed companies for each year and the
number of going-concern opinions for each year. The total number of going-concern
opinions for all firm years is 820 (8.87 per cent) out of the total sample of 9,240 firm-year
observations. Prior to 2010, the number of distressed firms ranged from a low of 1,224
firms in 2007 to a high of 1,649 firms in 2009.
Table I also shows that the total number of distressed firms decreased in 2010 and
2011 compared to that in all the previous years in the sample. This is likely a
combination of the weaker firms exiting the market during the financial crisis and the
surviving firms beginning to recover. These years also have the lowest levels of
 ARJ going-concern opinions. Our sample starts with the 2005 year which was only shortly after
28,2 the heightened going-concern opinions from the Enron era and the passage of the Sarbanes–
Oxley Act (Geiger et al., 2005; Fargher and Jiang, 2008; Feldmann and Read, 2010). Therefore,
the heightened conservatism of auditors may not have fully returned to normal until 2006
and then it began to rise again in 2007 with the onset of the recent crisis.
The sample only contains distressed firms that have negative earnings or operating
166 cash flows. The number of distressed firms is expected to increase during a financial
crisis. Likewise, with more distressed firms, one would expect more going-concern
opinions to be issued. However, should this lead to a higher percentage of distressed
firms receiving going-concern opinions?
Figure 1 shows the increase in the percentage of going-concern opinions out of total
distressed firms. In the years leading up to the recession (2005-2006), the going-concern
opinions range from 8.90 to 6.71 per cent of distressed firms. The recession officially
started in December of 2007. The percentage of going-concern opinions for the
distressed companies was 8.58 per cent in that year, and the following two years
(2008-2009) saw dramatic increases in the percentage of distressed companies receiving
going-concern opinions with 12.63 per cent in 2008 and 11.52 per cent in 2009.
Accounting Research Journal 2015.28:160-171.

To answer RQ1, that the relative proportion of going-concern opinions for distressed
companies increases during the financial crisis, we conducted a t-test on the proportion
of going-concern opinions in the years before the financial crisis versus the years of the
financial crisis. Table II, shows the results of the t-test. The years before the crisis are
defined as 2005 and 2006, and the years during the crisis are defined as 2008 and 2009.
The mean proportion of going-concern opinions from 2005 to 2006 is 0.0785, and the

Year Total firmsa GC opinionsb

2005 1,371 122

2006 1,252 84
2007 1,224 105
2008 1393 176
2009 1,649 190
2010 1,198 73
Table I. 2011 1,153 70
Number of distressed Total 9,240 820
firms and going-
a b
concern opinions by Notes: Total number of distressed firms per year; number of going-concern opinions for distressed
year firms

14%
12% 12.63%
11.52%
10%
Percentage

8.90% 8.58%
8%
Figure 1. 6.71% 6.09% 6.07%
6%
Percentage of 4%
distressed companies 2%
receiving 0%
going-concern 2005 2006 2007 2008 2009 2010 2011
opinions
Time period
 mean proportion of going-concern opinions from 2008 to 2009 is 0.1203. This difference Financial
is significant at p ⫽ 0.0001. This confirms RQ1 that a higher proportion of distressed crisis on
firms received going-concern opinions during the financial crisis.
After the financial crisis, the percentage of going-concern opinions returned to 6.09
auditor
and 6.07 per cent in 2010 and 2011, respectively. This is consistent with the findings of conservatism
Feldmann and Read (2010) that the elevated percentage of going-concern opinions
decreases quickly after the crisis has passed. 167
Table III separates the firms into two groups based on whether they are audited by a
Big 4 accounting firm. The results show that overall Big 4 accounting firms issued
going-concern opinions to 6.51 per cent of the financially distressed firms they audited,
while the non-Big 4 firms issued going-concern opinions to 11.50 per cent of the
financially distressed firms they audited. Table III also shows a breakdown of
going-concern opinions by year between Big 4 and non-Big 4 auditing firms.
Figure 2 shows that, in every year, the non-Big 4 firms had a higher percentage of
going-concern opinions. However, in 2009, during the financial crisis, the percentages
between the groups became closer. By 2010, the differences became more pronounced again.
The percentage of going-concern opinions increased for both groups during the financial
Accounting Research Journal 2015.28:160-171.

crisis, indicating that it is not an issue specific only to big or small auditing firms.
For the non-Big 4 firms, the percentage of going-concern opinions increased sooner,
but also decreased sooner after the crisis. The Big 4 firms did not show an increase in
going-concern percentages until 2008. The non-Big 4 firms reached a peak of 15.85 per
cent in 2008 and then began to come down. The Big 4 firms did not reach their peak of

During financial Table II.

crisis Comparison of
Pre-financial crisis (2008-2009) proportion of going-
(2005-2006) Means Difference p-value concern opinions.
Variable Means (n ⫽ 2,623) (n ⫽ 3,042) in means t-value (Two-tailed) Before financial crisis
(2005-2006) vs during
Going-concern financial crisis
opinions 0.0785 0.1203 0.042 5.216 0.0001 (2008-2009)

Big 4a Non-Big 4b
Year #Firmsc #GCd (%) #Firmse #GCf (%)

2005 727 45 6.19 644 77 11.96

2006 618 27 4.37 634 57 8.99
2007 590 26 4.41 634 79 12.46
2008 781 79 10.12 612 97 15.85
2009 804 85 10.57 845 105 12.43
2010 679 24 3.53 519 49 9.44
2011 657 30 4.57 496 40 8.06
Total 4,856 316 6.51 4384 504 11.50 Table III.
Going-concern
Notes: a Audited by a Big 4 auditing firm; b audited by a non-Big 4 auditing firm; c total number of opinions by auditor
distressed firms audited by Big 4 firms; d number of going-concern opinions from Big 4 firms; e total type and year. Big 4
number of distressed firms audited by non-Big 4 firms; f number of going-concern opinions from vs non-Big 4
non-Big 4 firms (N ⫽ 9,240)
 ARJ 10.57 per cent for going-concern opinions until 2009 before dramatically declining to
28,2 3.53 per cent in 2010.
A partial explanation of this difference is the number of firms from the non-Big 4
group that met the definition of distressed. In 2008, there were 612 distressed firms in
this group and 97 of them received a going-concern audit opinion. By 2009, there were
845 distressed firms in this group but only 105 of them received a going-concern audit
168 opinion. The difference between the two groups may also be influenced by a difference
in clientele between the types of audit firms.
To test RQ2, we use a logistic regression model. Table IV shows the results of the
logistic regression. The variable of interest is CRISIS. The variable for CRISIS had the
expected sign and is significant at the p ⬍ 0.001 level. The significance of the CRISIS
variable, even after controlling for the other bankruptcy prediction variables, indicates
that auditors became more inclined to issue going-concern audit opinions during the
crisis. The regression indicates that auditors were more likely to issue going-concern
opinions during the crisis for the same levels of the bankruptcy prediction criteria[1].
The variable for POSTCRISIS was not significant which was expected. This
Accounting Research Journal 2015.28:160-171.

suggests that the increased conservatism declined toward normal levels after the crisis
had passed. Auditors became more conservative at the height of the financial crisis but
returned to normal levels afterward.
The interaction term for the interaction of Z-SCORE and CRISIS is significant at the
p ⬍ 0.001 level. Because the CRISIS variable is either 0 or 1, the interaction term Z *
Crisis has a value of zero for all non-crisis years and is equal to Z-SCORE for the crisis
years. Z-SCORE is significant and has a positive coefficient in the model; however, the
coefficient on the interaction variable is ⫺0.079. There was no predicted sign for the
interaction term, but the negative coefficient means that the Z-score is less influential to
the going-concern decision during the crisis years than in the non-crisis years. This may
seem counter-intuitive due to the importance of going-concern opinions during crisis
years, but this does not mean auditors are not looking more closely at the companies.
Clearly, the overall level of going-concern opinions does increase during crisis years.
As Z-score is a summary number, the negative coefficient on the interaction term
may indicate that, in times of turmoil, auditors must dig deeper. Other factors or
firm-specific items may have greater predictive value during periods of financial crisis.
This study did not test all possible interactions. It is possible that other factors may be
more or less important to the going-concern decision during crisis years. Further
research on additional interaction items may help shed light on these issues.

18%
16%
14%
Percentage

12%
10%
8%
6%
Figure 2. 4%
Comparison of 2%
0%
change in
2005 2006 2007 2008 2009 2010 2011
going-concern
Time period
percentage for Big 4
vs Non-Big 4 Firms Big 4 Non Big 4
 Variables Predicted sign Coefficient p-value
Financial
crisis on
Intercept ? ⫺1.854 0.000***
CRISIS ⫹ 0.637 0.000***
auditor
POSTCRISIS ? ⫺0.120 0.368 conservatism
Z * CRISIS ? ⫺0.079 0.000***
LNTA ⫺ ⫺0.239 0.000***
Z-SCORE ⫹ 0.026 0.000*** 169
BIG4 ? 0.215 0.062*
VOLATILITY ⫹ 0.000 0.165
RETURN ⫺ ⫺0.009 0.066*
INVESTMENTS ⫺ ⫺0.579 0.004***
LEV ⫹ 0.183 0.007***
AUDELAY ⴙ 0.005 0.000***
FUTUREFINANCE ⴚ ⫺0.276 0.007***
IND Controlled
Model Chi-square 309.84
R2 9.9%
N 7,210
Accounting Research Journal 2015.28:160-171.

Notes: Model:

GC ⫽ ␤0 ⫹ ␤1 * CRISIS ⫹ ␤2 * POSTCRISIS ⫹ ␤3 * Z * CRISIS ⫹ ␤4 * LNTA

⫹ ␤5 * Z ⫺ SCORE ⫹ ␤6 * BIG4 ⫹ ␤7 * VOLATILITY ⫹ ␤8 * RETURN
⫹ ␤9 * INVESTMENTS ⫹ ␤10 *LEV ⫹ ␤11 * AUDELAY
⫹ ␤12 * FUTUREFINANCE ⫹ ␤13 * IND ⫹ ␧

The variables are defined as follows: GC ⫽ Going concern, 1 if audit opinion is first-time going concern,
0 otherwise; CRISIS ⫽ 1 if crisis period (2008 and 2009), else 0; POSTCRISIS ⫽ 1 if post-crisis period
(2010 and 2011), else 0; Z * CRISIS ⫽ Interaction term for Z-score and Crisis; LNTA ⫽ Natural log of
total assets (in millions of dollars); Z-SCORE ⫽ Z-score from Zmijewski’s (1984) model; BIG4 ⫽
Indicator variable that takes a value of 1 if audited by a Big 4 accounting firm, otherwise zero;
VOLATILITY ⫽ Standard deviation of annual stock returns in recent three years; RETURN ⫽
One-year common stock return; INVESTMENTS ⫽ Short- and long-term investment securities Table IV.
(including cash and cash equivalents) deflated by total assets (TA); LEV ⫽ Total liabilities over total Logistic regression
assets; AUDELAY ⫽ The number of calendar days from fiscal year-end to the date of the auditor’s testing effect of
report; FUTUREFINANCE ⫽ An indicator variable that takes the value of 1 if the firm has a new financial crisis years
issuance of equity or debt over the subsequent fiscal year; IND ⫽ Industry dummy variables as defined on auditor going-
in Krishnan (2005); *** and * denote significance at the 0.01 and 0.10 levels, respectively; p-values are concern opinions
one-tailed if direction is predicted, otherwise two-tailed (N ⫽ 7,210)

The variables for size (LNTA), Z-score (Z-SCORE), short- and long-term investments
(INVESTMENTS), leverage (LEV), audit delay (AUDELAY) and future financing
availability (FUTUREFINANCE) all had the predicted sign and were significant. The
variable for stock return (RETURN) was only marginally significant. The variable for
Big 4 auditing firm was marginally significant.

5. Conclusion
This paper examined the relationship between the recent financial crisis and auditor
conservatism. The financial crisis and the recession that started in December 2007 led to
 ARJ increased numbers of financially distressed firms. The greater number of financially
28,2 distressed firms also resulted in a greater number of going-concern opinions. Not only
did the number of going-concern opinions increase but also the percentage of financially
distressed firms receiving going-concern opinions increased. The increase in percentage
of going-concern opinions was not driven by the size of auditing firm as it holds true for
Big 4 accounting firms and non-Big 4 accounting firms.
170 Our regression results show that even after controlling for other predictors of
going-concern opinions, auditors were more likely to issue going-concern opinions
during the financial crisis. By 2010, the financial crisis had eased and the level of
going-concern opinions quickly dropped to pre-crisis levels not seen since before the
passage of the Sarbanes–Oxley Act. This indicates that the increased conservatism that
auditors displayed during the crisis did not continue after the crisis ended.

Note
1. As the variables “CRISIS” and “POSTCRISIS” are being compared to the pre-crisis years
(2005-2006), a positive coefficient for CRISIS or POSTCRISIS indicates that the probability of
Accounting Research Journal 2015.28:160-171.

receiving a going-concern opinion is higher relative to the pre-crisis period.

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About the authors

Joseph Beams is an Associate Professor of Accounting at the University of New Orleans. He holds
the Oil and Gas Professorship in Accounting. He conducts research in financial accounting and
taxation. He has published in a variety of academic and professional journals, including Journal of
Business Ethics, Accounting Horizons, Journal of Accountancy, Accounting and the Public Interest,
as well as other academic and professional journals. Joseph Beams is the corresponding author
and can be contacted at: jbeams@[Link]
Yun-Chia Yan (Anderson) is currently an Assistant Professor at the University of Texas at
Brownsville, USA. His research is in the areas of auditing, financial reporting, capital markets and
AIS. His articles have been published in various journals, including Asia-Pacific Journal of
Accounting and Economics (forthcoming), Accounting and the Public Interest (forthcoming),
Journal of Forensic and Investigative Accounting, International Journal of Banking and Finance,
Journal of Accounting and Finance andIssues in Information Systems.

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