Auditor Expertise and Bank Failure: Do Going Concern Opinions Predict Bank Closure?

Kose John and Shirley Liu ()
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Kose John: Finance Department, Stern School of Business, New York University, New York, NY 10012, USA
Shirley Liu: Ness School of Management and Economics, South Dakota State University, Brookings, SD 57006, USA

JRFM, 2025, vol. 18, issue 5, 1-27

Abstract: This study investigates how the quality of engagement auditors, assessed using the auditor’s industry expertise and size at both national and state levels, influences the likelihood of going concern opinion (GCO) issuance for U.S. banks from 2002 to 2023. We also examine how auditor quality affects the accuracy of GCOs, specifically regarding Type I (false positive) and Type II (false negative) errors in GCO issuance. Using a dataset of 4992 bank-year observations from 414 unique banks, we analyze the correlations between auditor characteristics and these error types. We find that state-level audit industry experts issue significantly more accurate GCOs, demonstrating lower rates of both Type I and Type II errors compared to their counterparts. National-level experts and larger audit firms primarily show a reduced likelihood of Type II errors, indicating a more conservative approach. Our findings underscore the importance of localized auditor expertise in assessing bank financial health and suggest that enhanced collaboration between auditors and regulators could improve the predictive power of GCOs. These results offer important implications for regulatory policy and emphasize the need for improved audit standards to bolster financial system stability.

Keywords: audit industry expert; auditor’s size; going concern opinion; Type I error; Type II error; bank closure (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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