Wu, C. T., Chiou, J. R., and Cheng, L. 2011. The Influence of Corporate Governance on a CPA’s Going-concern Opinion for Financially Distressed Firms: An Empirical Study for Firms Listed in the Taiwan Stock Exchange. NTU Management Review, 21 (2): 187-218
TsingZai C. Wu, Professor, Department of Accounting, National Cheng Kung University
Jeng-Ren Chiou, Professor, Department of Accounting, National Cheng Kung University
Li Cheng, Assistant Professor, Department of Accounting, Providence University
For a financially distressed firm, the decision of a CPA to issue a going-concern opinion must consider the trade-off between “economic dependence” and “reputation protection”. In this paper, we investigate the influence of corporate governance on a CPA’s going-concern opinion for financially distressed firms. As the cost to switch its CPA is inexpensive for a firm, the CPA has motive of not being dismissed. Such “economic dependence” consequently leads to a compromise of CPA’s independence. Moreover, since the probability of auditor litigation caused by business failure is low in Taiwan, the motive of “reputation protection” for a CPA reduces. Our empirical results indicate that the larger shares directors and supervisors hold, the less likelihood a CPA issuing a going-concern opinion. Similar results are found for the outside blockholdings. Where the shares of directors and supervisors are used as collateral and the chairman of the board also serves as the CEO, the likelihood of a CPA to issue a going-concern opinion increases.
going-concern opinion audit quality corporate governance