Do Auditors Treat Clients Engaging in Research and Development Differently When Issuing Going Concern Modifications?

SUMMARY

Companies with research and development (R&D) activity operate differently from traditional companies because they depend more on innovation to generate value. Analyzing R&D companies is challenging because R&D accounting treatment reduces current earnings and does not fully capture future value. We investigate whether and how R&D expenditures impact auditor going concern modification (GCM) decisions. We document a positive relation between R&D intensity and the likelihood of a GCM. We also find a positive relation between R&D intensity and GCM accuracy in terms of the likelihood of Type II errors (i.e., bankrupt clients not receiving a GCM). Finally, we show that auditors of R&D companies put less weight on traditional accounting-based bankruptcy metrics when issuing GCMs than do auditors of non-R&D companies. We contribute to the auditing literature examining the issuances of GCMs and to research examining the evaluation of R&D company operations and performance.

Data Availability: Data are available from the public sources cited in the text.

JEL Classifications: G33; M4; M42.