Major Customer Reliance and Big 4 Auditor Going Concern Decisions Dan Dhaliwal, Paul N. Michas, Vic Naiker and Divesh S. Sharma Coles Working Paper Series, FALL15-06, October 2015
Audit clients’ reliance on major customers for sales affects clients’ profitability, cash flow and future viability. To understand whether auditors evaluate value chain relationships between audit clients and their major customers, we examine auditors’ going concern modification decisions for a sample of financially distressed clients. Findings suggest that Big 4 auditors are more likely to issue going concern modifications to distressed clients when they rely more heavily on major customers. However, we find that Big 4 auditors are not equal; compared to higher quality Big 4 auditors, only lower quality Big 4 auditors are more likely to issue a going concern modification, particularly when audit clients relying more heavily on major customers are more financially distressed. When we evaluate the accuracy of Big 4 auditors’ going concern modification decision in context of clients’ reliance on major customers, we discover that lower quality Big 4 auditors are less accurate in their assessment of clients’ going concern status, but higher quality Big 4 auditors are more accurate. Overall, the evidence we present suggests the quality of Big 4 auditors influences their evaluation of financially distressed clients’ business risks stemming from clients’ reliance on major customers. Overview
18 | Coles Working Paper
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