Audit Reporting for Going Concern Uncertainty

This chapter is aimed at reviewing the going concern (GC) assumption evolution over time in the two main regulatory accounting and auditing settings: International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) as regards the accounting standard setters, and International Auditing and Assurance Standards Board (IAASB) and Public Company Accounting Oversight Board (PCAOB) as regards the auditing standard setters. Addressing the GC evolution is prodromic to go further in depth on the academic debate about the relevance that GC assumption has throughout the financial reporting process: from the preparation of financial statements, to the audit process that ends with the issuance of the audit report. Lastly, some insights about the GC evolution in other countries’ regulatory frameworks are provided (Australia, Canada, China, Japan, Russia and Singapore) in order to outline a worldwide representation of the GC auditing and accounting regulatory frameworks.

This chapter, using a narrative literature review, goes to the heart of the academic debate about Audit Reporting for Going Concern Uncertainty (GCU). With the aim of enhancing the understandability of the review, the studies are classified following the same, and well-known in the literature, categorization adopted by Carson et al. (2013). The purpose is to provide a worldwide faithful representation of what scholars have said over time with respect to Audit Reporting for GCU. This effort is necessary for a twofold reason: On the one hand it fills the gap of a missing worldwide representation of this richest debate; on the other, it helps scholars in understanding which are topics and subjects unexplored or underexplored that deserve academic and, not only, future engagement. Lastly, it provides auditors and regulators with a global synthesis about the determinants, accuracy and consequences of Going Concern Opinions (GCOs), fostering further fine tuning actions of regulatory frameworks across the world.

The literature related with financial reporting events (such as earnings forecast, annual reports releases, financial plan, takeover, merger announcements etc.) is controversial. The main issue arises to confirm whether and to what extent those events affect stock market returns. As regards audit reports release and their impact on the stock market, many studies attempted overtime to capture the magnitude of these phenomena. This chapter aims at exploring the same phenomenon. I use the Event Study methodology (ES) to test whether GCOs impact on stock returns of firms listed at the Italian stock exchange, from 2008 to 2014, alongside the financial crisis. Findings are partially in line with previous studies shedding a light on the negative impact of GCOs on stock market returns, signalling a certain degree of value relevance. The main novelty is that Italian investors reacted (on average) negatively even when GCOs are attached to clean opinions. According to Carson et al (Audit A J Pract Theory 32(1):353–384, 2013) categorization, this research falls in full among studies aimed at detecting consequences of GCOs for shareholders. Moreover, the location matter of the study seems particularly useful because only another study (Ianniello and Galloppo in Manag Audit J 30(6/7):610–632, 2015) has detected the impact of GCOs on stock market returns in Italy.

This chapter provides the main findings reached from the journey through Audit Reporting for GCU. First of all, it résumés the main insights retrieved from the narrative literature review performed in Chap. 2; secondly, it contextualizes the results achieved in the empirical study (Chap. 3) conducted regarding the consequences on investors in Italy, also in Chap. 3; lastly, it outlines future trajectories for: scholars, suggesting future pathways of research and stressing the importance to “glocalize” results achieved, especially in archival studies; regulators, asking for a fine tuning action of current standards in accordance with the evidence provided throughout this study; auditors, calling for fair opinions more than in the past in the light of new standard requirements and to prevent other financial crises and/or scandals; investors, demanding a higher awareness about the deep meaning of a GCO, especially after novelties occurred that have rendered a GCO close to being mandatory, as seen in Chap. 1.