Employee firing costs and auditors’ going-concern opinions: Evidence from wrongful discharge laws |
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| Institution: | 1. Faculty of Business and Economics, The University of Hong Kong, Hong Kong, China;2. School of Economics and Management, Harbin Institute of Technology, Shenzhen, China;1. University of Michigan-Flint, Flint, MI, United States;2. Miami University, Oxford, OH, United States;3. University of Memphis, Memphis, TN, United states;4. Old Dominion Unversity, Norfolk, VA, United States;1. Kobe City University of Foreign Studies, 9-1 Gakuen Higashimachi, Nishi-ku, Kobe, Hyogo 651-2102, Japan;2. Graduate School of Economics, Osaka University. 1-7 Machikaneyama, Toyonaka, Osaka 560-0043, Japan;1. University of Wisconsin – Whitewater, Department of Accounting, College of Business, Timothy J Hyland Hall 3431, Whitewater, WI 53190, United States;2. Clemson University, School of Accountancy, Wilbur O. and Ann Powers College of Business, 424B Walter T. Cox Blvd., Clemson, SC 29634, United States;3. Clemson University, Department of Finance, Wilbur O. and Ann Powers College of Business, 225 Walter T. Cox Blvd., Clemson, SC 29634, United States;1. School of Economics and Management, Tsinghua University, Beijing 100084, China;2. Guanghua School of Management, Peking University, Beijing 100085, China;3. School of Accountancy, Singapore Management University, Singapore 188065, Singapore;4. College of Economics and Management, China Agricultural University, Beijing 100083, China;1. NUS Business School, National University of Singapore, Singapore;2. School of Accountancy, Singapore Management University, Singapore |
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| Abstract: | This paper examines the impact of employee firing costs on auditors’ going-concern (GC) reporting decisions by exploiting the wrongful discharge laws (WDLs) adopted by U.S. states. We find that auditors are more likely to issue GC opinions to financially-distressed clients headquartered in states that have adopted the laws, in particular the good faith exception, than to clients in states that have not. This finding is robust to controlling for the state-level economics, the strictness of legal liability rules, audit office fixed effects, as well as alternative definitions of financial distress and estimation methods. The impact is concentrated in labor-intensive clients and clients in industries with a higher proportion of nonunionized or permanent employees. We further find that the increased propensity to issue GC opinions is attenuated when the auditor is economically dependent on the client, and is driven by auditors who possess labor-specific expertise. Overall, these findings are consistent with higher firing costs increasing auditors’ propensity to issue GC opinions. |
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| Keywords: | Employee firing costs Wrongful discharge laws Financial distress External auditors Going-concern opinions |
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