Does the "qualification” in an auditor’s report matter in the presence of going concern uncertainties?: evidence from Australia

Abstract

Research conducted on the information content of going concern “modified” reports in the United States and United Kingdom indicate that a modified audit report does not appear to have information content to users once the going concern contingency is disclosed in the notes to the financial statements. This raises the question as to whether any form of qualification is necessary since readers appear not to give additional credence to the auditor’s report once the going concern contingency is reported. In this study we provide evidence from Australia. We examine whether modification/ qualification by an auditor in Australia (an “emphasis of matter” and an “except for” report respectively) has information content to a user. The results indicate that, if the company is in a state of financial distress, the qualification, in either form, does not appear to significantly enhance either perceptions of risk or decision making. While the auditor’s report was perceived to be useful in that it helped loan officers to focus on matters raised in the report, the qualification appears not to have incremental information content. While one could expect the emphasis of matter report to not communicate any additional information (as the information addressed in the emphasis of matter section has already been disclosed as a note in the financial statements), a similar finding with respect to the except for report (which is issued due to lack of appropriate disclosure) is surprising. The conclusion is that, even in the presence of inadequate disclosure, if the numbers in the financial statements appear to indicate financial distress, the communication in the auditor’s report is not given additional credence.