Decision Sciences Journal
Volume 31, Number 2
Spring 2000
Modeling the Audit Opinions Issued to Bankrupt Companies:
A Two-stage Empirical Analysis
Jeffrey R. Casterella
Colorado State University, College of Business, Fort Collins,
CO 80523,
email: casterel@lamar.colostate.edu
Barry L. Lewis
University of Colorado – Boulder, College of Business, Boulder,
CO 80309,
email: barry.lewis@colorado.edu
Paul L. Walker
University of Virginia, McIntire School of Commerce, Charlottesville,
VA 22903,
email: pw4g@forbes2.comm.virginia.edu
ABSTRACT. Many observers are dissatisfied with the
accounting profession’s ability to warn the public of upcoming
bankruptcy filings. Since regulators and users tend to treat
an unmodified audit opinion as a “clean bill of health,”
they do not expect the business to fail in the near future. Research
has shown that more often than not, auditors end up letting users
down when it comes to predicting bankruptcy filings with audit
opinions.
Although auditors assert they are not responsible for predicting
future events, it is very clear that their opinion decision is
evaluated, at least in part, based on events that occur after
the audit report date. The interesting and logical next step
is to find out how companies exit bankruptcy. Do they liquidate
or reorganize? Successful reorganization may, in the end, exonerate
auditors and preserve their role as an early warning device.
The opinion prediction model developed in the paper introduces
a new bankruptcy resolution variable that proxies for the auditor’s
prognosis of the ultimate disposition of the soon-to-be-bankrupt
company. Using a sample of bankruptcy filings between 1982 and
1992, we find that auditors do not seem to be able to predict
filings or resolution. Our tests of bankruptcy resolution support
what auditors have been arguing for years: that they are not
clairvoyant with respect to a client’s future.
Subject Areas: Auditing, Bankruptcy Filings, Bankruptcy
Resolution, Going Concern Opinions, Logit Modeling, and Simultaneous
Equations. |