Decision Sciences Journal
Volume 30, Number 3
Summer 1999
The Auditor’s Going-Concern Disclosure as a Self-Fulfilling
Prophecy: A Discrete-Time Survival Analysis
Timothy J. Louwers
Department of Accounting, E. J. Ourso College of Business Administration,
Louisiana State University, Baton Rouge, LA 70803, e-mail: louwers@lsu.edu
Frank M. Messina
Department of Accounting, School of Business, University of Alabama
at Birmingham, Birmingham, AL 35294-4460, e-mail: fmessina@uab.edu
Michael D. Richard (Deceased)
College of Business and Industry, Mississippi State University,
Starkville, MS 39762-5661
ABSTRACT. The question of how an auditor’s going-concern
disclosure affects a client’s future operations has long
troubled the auditing profession. In an attempt to provide further
understanding of this issue, we introduce Discrete-Time Survival
Analysis (DTSA) to examine the aftermath of 231 first-time going-concern
disclosures on clients’ subsequent continuance. DTSA represents
a significant refinement over traditional ordinary least squares
(OLS) and logistic (LOGIT) regression in that it provides not
only a probability estimate, but also an estimate of the timing
of the event occurrence. The addition of this extra dimension
(event timing) aids decision makers by providing more complete
information about event probabilities.
Consistent with the “self-fulfilling prophecy effect,”
the risk profiles developed from DTSA indicate that the first
year subsequent to the initial going-concern disclosure was the
most dangerous in terms of risk of bankruptcy. However, after
the first year, the incidence of bankruptcy decreases significantly.
Thus, DTSA is able to provide a richer perspective on this perplexing
issue than previously considered.
Subject Areas: Audit, Discrete-Time Survival Analysis,
Going-Concern, Logit Modeling, and Self-Fulfilling Prophecy. |