Auditors’ propensity to issue Going Concern Audit Reports (GCARs) is one of the proxies often used for audit quality. Although this propensity is a distinguishing characteristic of auditors, it does not indicate quality according to both theory and practice. In theory, higher quality auditors make fewer audit errors; they are more likely to issue GCARs to clients that deserve them and less likely to issue GCARs to clients that do not. Therefore, the propensity itself does not indicate quality. In practice, Public Company Accounting Oversight Board (PCAOB) inspection reports reveal that the GCAR is rarely mentioned as a deficiency, and in the few cases in which it is discussed, the deficiency is attributed to evidence gathering and estimations, rather than to the GCAR decision itself. The theory and practice motivate our study. This article investigates the empirical ability of the GCAR propensity to proxy for audit quality and finds that different samples and different models yield different determinations of auditor quality. Our findings caution against the use of the propensity to issue GCARs as a proxy for audit quality.
This article analyzes the impact of Public Company Accounting Oversight Board (PCAOB)-type regulatory oversight and legal liability on audit quality and social surplus. We show the conditions under which regulatory oversight can improve audit quality and social surplus, as compared with the impact of legal systems. Moreover, we demonstrate that regulatory oversight is not likely to substitute effectively for a legal system. This is the first study that analyzes the possible effects of an audit regulator on auditors under different legal systems, and our results enhance understanding of the complex relationship between regulatory oversight, a legal system, and social surplus.
Research in corporate financial reporting identifies two important roles of accounting accruals. First, accruals smooth fluctuations in operating cash flows. Second, accruals allow recognition of losses in an asymmetric timely manner. While these two roles imply different relations between individual accrual components and operating cash flow news, prior research often focuses on the properties of aggregate accruals. We investigate the role of individual accrual components and identify asymmetry in the relation of investment with operating cash flow news as a confounding factor. We show that this investment factor operates through depreciation and amortization accruals, which typically account for the bulk of aggregate accruals. Overall, our article demonstrates the importance of adopting a granular approach to identifying the different roles of individual accrual components.
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