Audit Engagement Risk and the Propensity of Issuing Going-Concern Opinion – Does Audit Firm Tenure Matter?
Li (Lily) Zheng Brooks, Michael D. Yu

Different from prior literature that focuses on the independence implications of extended auditor-client relationship on the propensity of issuing going-concern modified opinions (GCs), we adopt a risk perspective and argue that any association between auditor tenure and the propensity of issuing GCs should be conditional on auditor’s assessment of audit engagement risk. Using corporate social responsibility performance (CSR risk) as a proxy for audit engagement risk, we find that the propensity of going-concern opinions (GCs) is muted when client firms have average level of CSR risk and decreases with CSR risk for client firms with average length of audit firm tenure. In contrast, the likelihood of GCs increases with CSR risk for client firms with above average audit firm tenure. Moreover, graphical evidence reveals that the propensity of GCs is a convex decreasing function of CSR risk for initial audit engagements but exhibits a convex increasing function of CSR risk for lengthy auditor-client engagements beyond 12 years. This study furthers our understanding on the effect of audit firm tenure on auditor’s GC decisions as a function of audit engagement risk.

Full Text: PDF     DOI: 10.15640/jibe.v3n2a2