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Keywords:

  • Audit;
  • Discrete-Time Survival Analysis;
  • Going-Concern;
  • 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.