Corporate Innovation and the Auditor's Assessment of Going Concern

Abstract

In this study, we examine whether external auditors assess corporate innovation activities when considering a financially distressed client's ability to continue as a going concern. Using patent count, patent market value, and patent citation to measure the firm-level innovation output, we document that higher quantity and quality of innovation activities are associated with a lower likelihood of going concern opinions. The association between innovation and going concern opinions is more pronounced for audit offices with high exposure to corporate innovation and clients operating in R&D-intensive industries. In additional analyses, we confirm that innovation is associated with future business value, as measured by future profitability and intellectual property licensing agreements. We conclude that corporate innovation represents a mitigating factor when auditors consider whether a going concern opinion is appropriate for a financially distressed client.