We gratefully acknowledge the helpful comments of the associate editor and two anonymous reviewers whose comments have greatly improved the paper. We also wish to thank Wes Andrews, Joe Carcello, Dana Hermanson, Jan Meade, Bob Ramsey, Marybeth Stocken, Jerry Strawser, and workshop participants at Louisiana State University and the University of Houston. Earlier versions of this paper were presented at the 1995 National Meeting (Forum) of the American Accounting Association, the 1996 Mid-Year Auditing Meeting, and the 1996 SWFAD Meeting.
The Auditor's Going-Concern Disclosure as a Self-Fulfilling Prophecy: A Discrete-Time Survival Analysis*
Article first published online: 7 JUN 2007
Volume 30, Issue 3, pages 805–824, June 1999
How to Cite
Louwers, T. J., Messina, F. M. and Richard, M. D. (1999), The Auditor's Going-Concern Disclosure as a Self-Fulfilling Prophecy: A Discrete-Time Survival Analysis. Decision Sciences, 30: 805–824. doi: 10.1111/j.1540-5915.1999.tb00907.x
- Issue published online: 7 JUN 2007
- Article first published online: 7 JUN 2007
- Received: June 23, 1996; Accepted July 28, 1998.
- Discrete-Time Survival Analysis;
- Logit Modeling;
- Self-Fulfilling Prophecy.
The question of how an auditor's going-concern disclosure affects a client's future operations has long troubled the auditing profession. In an attempt to provide further understanding of this issue, we introduce Discrete-Time Survival Analysis (DTSA) to examine the aftermath of 231 first-time going-concern disclosures on clients' subsequent continuance. DTSA represents a significant refinement over traditional ordinary least squares (OLS) and logistic (LOGIT) regression in that it provides not only a probability estimate, but also an estimate of the timing of the event occurrence. The addition of this extra dimension (event timing) aids decision makers by providing more complete information about event probabilities.
Consistent with the “self-fulfilling prophecy effect,” the risk profiles developed from DTSA indicate that the first year subsequent to the initial going-concern disclosure was the most dangerous in terms of risk of bankruptcy. However, after the first year, the incidence of bankruptcy decreases significantly. Thus, DTSA is able to provide a richer perspective on this perplexing issue than previously considered.