How do auditors respond to client firms’ technological peer pressure? Evidence from going‐concern opinions

Xiaolu Xu, Leo L. Yang and Joseph H. Zhang

Journal of Business Finance & Accounting, 2022, vol. 49, issue 9-10, 1553-1580

Abstract: We examine whether auditors consider financially distressed clients’ technological peer pressure (TPP) in their going‐concern assessments. While auditing standards highlight the importance of understanding the competitive environment in risk assessments and going‐concern assessments, it is not clear whether and to what extent auditors assess different dimensions of industry competition in evaluating firms’ ability to continue as a going concern. We show that a client firm's TPP in the prior year increases the likelihood that it is issued a going‐concern opinion in the current year. This dimension of industry competition is more relevant in auditor evaluations than product market threats and supply chain competition. Further, we find that the positive association is more pronounced when a client firm's auditor audits more industry peers and when a client's peer firms have greater innovative originality. Finally, we find evidence that greater TPP results in more conservative going‐concern reporting.

Date: 2022
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