Investor Reaction to Auditors' Going Concern Emphasis of Matter: Evidence from a Natural Experiment

What is it about?

A 2010 change in Canadian regulation has provided a unique opportunity to investigate the incremental investor reaction to "going concern uncertainty" disclosures mentioned in both the auditor's report and the financial statement notes, in comparison to disclosure in the notes only. Our results suggest that under the old regime in which the auditor's report did not refer to going concern uncertainty, investors reacted negatively to first-time going concern disclosures only when severe language was used in the notes to financial statements. Under the new regime in which the auditor's report highlights going concern uncertainties, we find that first-time going concern disclosures are associated with negative abnormal returns, regardless of the linguistic tone (weak or severe) used in the notes. We conclude that the auditor's emphasis on going concern uncertainty disclosures has incremental value to investors, which supports recent regulatory initiatives to enhance the content of the auditor's report.

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