The going-concern opinion and the adverse credit rating: an analysis of their relationship
ISSN: 1030-9616
Article publication date: 20 December 2021
Issue publication date: 17 June 2022
Abstract
Purpose
The purpose of this study is to examine the relationship between going-concern (GC) opinions issued by the Big 4 audit firms and adverse credit ratings from the two largest credit rating agencies (CRAs) – Standard & Poor’s (S&P) and Moody’s. This question is relevant because there have been suggestions that auditors and CRAs should become more similar to each other, and because the two largest CRAs have different ownership structures that could affect their ratings.
Design/methodology/approach
Univariate and multivariate analyses are performed using a sample of firms that filed for bankruptcy between January 1, 2002 and December 31, 2013 that also had an audit opinion signed during the 12 months prior to bankruptcy, along with a credit rating issued by either or both S&P and Moody’s. Both influence each other. The likelihood of an auditor issuing a GC opinion is related to the credit rating issued by both S&P and Moody’s in the month prior to the audit report signing. The results also show differences between the CRAs. S&P reacted in the month after an auditor issued a GC opinion by downgrading its ratings 68% of the time. However, Moody’s did not react as strongly as S&P, downgrading its ratings only 24% of the time.
Findings
Both audit reports and credit ratings influence each other. The likelihood of an auditor issuing a GC opinion is related to the credit rating issued by both S&P and Moody’s in the month prior to the audit report signing. The results also show differences between the CRAs. S&P reacted in the month after an auditor issued a GC opinion by downgrading its ratings 68% of the time. However, Moody’s did not react as strongly as S&P, downgrading its ratings only 24% of the time.
Originality/value
Auditors are more likely to issue GC opinions when there is a downgrade to the credit rating, and CRAs are more likely to downgrade their ratings when there is a GC opinion. The study highlights that CRAs with different ownership structures provide different credit rating outcomes.
Keywords
Acknowledgements
The authors appreciate helpful comments by Philip Sinnadurai and the participants at a workshop at Macquarie University, and at the European Accounting Association Congress and Auckland Region Accounting conference. David Lau also acknowledges financial support from Japan Society for the Promotion of Science (JSPS KAKENHI Grant Number JP19K13866).
Citation
Strickett, M., Hay, D.C. and Lau, D. (2022), "The going-concern opinion and the adverse credit rating: an analysis of their relationship", Accounting Research Journal, Vol. 35 No. 4, pp. 470-489. https://doi.org/10.1108/ARJ-04-2021-0135
Publisher
:Emerald Publishing Limited
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