ترازنامه سیاست محافظه کاری و گزارش حسابرسی محافظه کار Balance Sheet Conservatism and Audit Reporting Conservatism

1. INTRODUCTION Under conservative accounting, book values should reasonably proxy for liquidation values, thereby allowing lenders to better monitor the borrower‟s ability to repay (Watts, 2003). However, financial reports are generally prepared on a going-concern (GC) basis rather than a liquidation basis. This gives distressed companies considerable leeway to report book values of assets that exceed their liquidation values. We argue that conservative audit reporting helps to compensate for this lack of conservatism in the balance sheet. In particular, auditors are more likely to issue GC opinions when the book values of assets are high compared with their expected liquidation values. This interaction between balance sheet conservatism and GC reporting has not been previously discussed or empirically examined in the literature. Instead, prior studies examine whether auditors‟ GC opinions provide a cautionary warning to investors about the probability of bankruptcy. Our study is different because we focus on the expected outcome of bankruptcy rather than the likelihood of bankruptcy taking place. That is, we focus on the assets‟ liquidation values and the differences between these liquidation values and the assets‟ reported book values under the GC assumption. 1 Our first hypothesis is that auditors issue GC opinions when the liquidation values of assets are expected to be low relative to their book values. In short, if two companies have the same probability of bankruptcy and identical liquidation values, then a GC opinion is more likely to be issued to the company whose assets have higher book values. This first hypothesis takes an auditor perspective in explaining the auditor‟s decision to issue a GC opinion. Our second hypothesis takes the perspective of financial statements users. In particular, we test whether the issuance of a GC opinion has incremental information content for predicting the future realization rate (where the future realization rate is the ratio of future liquidation value to book value). If the GC opinion signals an auditor‟s private information about the lack of balance sheet conservatism, we expect the issuance of a GC opinion to predict lower future realization rates among the companies that file for bankruptcy.