An Experimental Investigation of Alternative Going Concern Reporting Formats : A Canadian Experience

Canadian reporting standards do not require the auditor's report to be qualified (modified) if the going-concern contingency is described in the notes that accompany the financial statements. In response to criticism that this approach is passive and the signal mute (Boritz 1991), the Canadian Institute of Chartered Accountants issued an exposure draft where the going-concern uncertainty was highlighted separately as a quot;stand-alonequot; note. The intent of the note was to provide a stronger warning signal to financial statement users. The standard has been withdrawn (CICA 1999) but discussions with members of the standard setting body indicate that the issue is still of concern and that the project is currently being considered by the recently established International Auditing Practices Committee (IAPC). This study examines the incremental information content of the current integrated note standard relative to the stand-alone note proposed (now rescinded) exposure draft and the modified auditor's report with an end note standard, which is generally required in most developed foreign nations. The results indicate that Canadian bank loan officers, view more negatively and in ranked order the modified auditor's report to the stand-alone note to the integrated note. Although ranked ordered, the results further indicate that the loan officer's reaction is strongest when the auditor's report is modified with an explanatory paragraph detailing the uncertainty and referencing the appropriate note in the footnotes