The going-concern opinion and the adverse credit rating: an analysis of their relationship

Matthew Strickett, David C. Hay*, David Lau

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

Purpose: The purpose of this study is to examine the relationship between going-concern (GC) opinions issued by the Big 4 audit firms and adverse credit ratings from the two largest credit rating agencies (CRAs) – Standard & Poor’s (S&P) and Moody’s. This question is relevant because there have been suggestions that auditors and CRAs should become more similar to each other, and because the two largest CRAs have different ownership structures that could affect their ratings. Design/methodology/approach: Univariate and multivariate analyses are performed using a sample of firms that filed for bankruptcy between January 1, 2002 and December 31, 2013 that also had an audit opinion signed during the 12 months prior to bankruptcy, along with a credit rating issued by either or both S&P and Moody’s. Both influence each other. The likelihood of an auditor issuing a GC opinion is related to the credit rating issued by both S&P and Moody’s in the month prior to the audit report signing. The results also show differences between the CRAs. S&P reacted in the month after an auditor issued a GC opinion by downgrading its ratings 68% of the time. However, Moody’s did not react as strongly as S&P, downgrading its ratings only 24% of the time. Findings: Both audit reports and credit ratings influence each other. The likelihood of an auditor issuing a GC opinion is related to the credit rating issued by both S&P and Moody’s in the month prior to the audit report signing. The results also show differences between the CRAs. S&P reacted in the month after an auditor issued a GC opinion by downgrading its ratings 68% of the time. However, Moody’s did not react as strongly as S&P, downgrading its ratings only 24% of the time. Originality/value: Auditors are more likely to issue GC opinions when there is a downgrade to the credit rating, and CRAs are more likely to downgrade their ratings when there is a GC opinion. The study highlights that CRAs with different ownership structures provide different credit rating outcomes.

Original languageEnglish
Pages (from-to)470-489
Number of pages20
JournalAccounting Research Journal
Volume35
Issue number4
DOIs
Publication statusPublished - 2022 Jun 17

Keywords

  • Audit firms
  • Auditing
  • Credit ratings
  • Going-concern opinions

ASJC Scopus subject areas

  • Accounting
  • Finance

Fingerprint

Dive into the research topics of 'The going-concern opinion and the adverse credit rating: an analysis of their relationship'. Together they form a unique fingerprint.

Cite this