The effects of the type and content of audit reports for financially stressed initial public offerings on information uncertainty

Steven E. Kaplan, Gary K. Taylor, David D. Williams

Research output: Contribution to journalArticle

Abstract

The Public Company Accounting Oversight Board (PCAOB) has expressed concern that audit reports do not contain sufficient variation to provide useful information to the market. Using a sample of financially stressed initial public offering (IPO) firms, we investigate whether information uncertainty is affected by (1) three different types of audit reports—unqualified (clean), hybrid (with explanatory language about financial stress), and going concern (GCAR)— and (2) audit report disclosures. We provide evidence that audit reports (hybrid and GCAR) and audit report disclosures provide useful information to the market by finding a significant reduction in information uncertainty. Just as important, we find that management discretionary going concern disclosures do not complement or substitute for the reduction in information uncertainty associated with hybrid audit reports and GCARs. We provide evidence that current audit report types and disclosures of financially stressed IPO firms provide information to the market.

Original languageEnglish (US)
Pages (from-to)125-150
Number of pages26
JournalAuditing
Volume39
Issue number1
DOIs
StatePublished - Feb 2020

Keywords

  • Going concern audit reports
  • Hybrid reports
  • IPO underpricing
  • Initial public offerings
  • Post-IPO performance

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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