Going Concern Audit Opinions: Good News for Corporate Insiders?

Date
2019-08-27
Authors
Hodgson, Allan
Ho, Sandra
Xiong, Zhengling
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Abstract
We report that corporate insiders are able to profit from conservative first time going concern audit opinions (GCOs). GCOs comprise a high percentage of Type I error that transforms into a going concern opinion withdrawal (GCOW) within one year. We conjecture and affirm that the anticipatory trading of corporate insiders, who have access to firm based private information, drives positive abnormal returns before a GCOW and this increased trading volume is associated with firms that have audit determined financial issues. The degree of economic significance is highlighted by constructing arbitrage hedge portfolios that follow the trading of all corporate insiders in GCOW firms, by returning abnormal profits of 25.36% over 60 days.
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Going concern audit opinions, Type 1 audit error, Auditing and insider trading
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