Auditor Reporting Behavior When GAAS Lack Specificity: The Case of SAS No. 59

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Statement on Auditing Standards No. 59 did not clearly specify the language to be used in the going concern (GC) report.Subsequent standards prohibited GC reports that failed to use the terms “substantial doubt” and “going concern” and that used conditional language. We find that: (1) most “subsequently prohibited” (SP) GC reports (those that fail to use the terms “substantial doubt” and “going concern” or that use conditional language) contain conditional language and refer to financing and capital issues; (2) practicing CPAs and regulators have concerns about clients pressuring auditors to soften the wording of GC reports, but also recognize the potential for SP GC reports using conditional language to better communicate the auditor’s GC assessment; (3) SP GC reports are associated with more established auditor-client relationships and lower levels of financial distress; and (4) companies receiving SP GC reports appear less likely to declare bankruptcy than companies receiving standard GC reports.There remain many unanswered research questions regarding the public policy implications of “flexible” versus “boilerplate” auditor reporting. Flexible GC reporting currently is allowed under international audit standards, and in the wake of Enron, some have called for flexible, “open-ended” audit reports in the US to enhance auditor communication.