Going_concern_modifications,_C - The current issue and full text archive of this journal is available at www.emeraldinsight.com\/0268-6902.htm Going

Going_concern_modifications,_C - The current issue and...

This preview shows page 1 - 2 out of 18 pages.

Going concern modifications, CPA firm size, and the Enron effect George E. Nogler Merrimack College, North Andover, Massachusetts, USA Abstract Purpose – The bankruptcy of Enron and the subsequent demise of Arthur Andersen brought intense scrutiny to the accounting profession. That these events would have an effect on auditor going concern modification judgments and accounting regulation would not be surprising. This study aims to look at 1,204 publicly traded firms that filed bankruptcy in the period January 1, 1997 through December 31, 2005. Design/methodology/approach – The observations are divided into pre-Enron and post-Enron periods. The paper finds the 18 largest bankruptcies represented 47 percent of the total assets entering bankruptcy in this period. Findings – The going concern modification rate in the pre-Enron period was 44.5 percent, in the post-Enron period, 61.9 percent. Findings show auditors, in the presence of a consistent standard, nevertheless modify their decision making as a result of external events. This study further looks at the impact of outliers on this decision and on differences by firm size. Research limitations/implications – By considering the entire population of publicly traded firms filing bankruptcy, overall implications and statistics are provided. This method does not allow the use of certain traditional modeling techniques. Practical implications – The research shows auditors, despite a consistent standard, vary their going concern judgments based upon external events. The paper also suggests that “one size fits all” regulatory models may not be cost effective across the population of public firms. Originality/value – The research provides a summary of the characteristics of the population of firms filing bankruptcy for an extended period across a changing reporting and regulatory environment. Keywords Auditing, Bankruptcy Paper type Research paper Introduction From the bankruptcy filing of Enron on December 2, 2001 for the next 12 months, an unprecedented string of large bankruptcies and corporate scandals emerged. Six of the ten largest corporate bankruptcies occurred in this 12-month period. Of these six, all received unmodified opinions and four of the six (WorldCom, Enron, Global Crossing, and UAL Corp.) were clients of Arthur Andersen. The public outcry over the failure of Enron led to the passage of the Sarbanes-Oxley Act (2002) in July. Enron was also the proximate cause of the demise of Arthur Andersen. The cascading disclosures of corporate scandals by firms which did not ultimately fail (e.g. Tyco, AOL) as well as a high number of corporate failures in 2002 created extraordinary pressures on auditors of publicly traded companies. Although auditor guidance concerning the issuance of going concern modifications did not change in the period from the enactment of the Private Securities Litigation Reform Act (PSLRA, 1995) and the bankruptcy of Enron, auditor perception of the risk The current issue and full text archive of this journal is available at

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture