Does Audit Oversight Matter for Management Going‐Concern Disclosures? Evidence From Japan

ABSTRACT

This study examines whether managers continue to disclose going‐concern risks when audit oversight is reduced. While regulators have generally responded to the concerns regarding going‐concern risk disclosures by strengthening audit oversight, Japan's 2009 reform provides a unique setting in which oversight was relaxed. Using data on financially distressed firms, we find that both the likelihood and extent of going‐concern disclosures were sustained after the reform. The results indicate that relaxing audit verification did not diminish disclosure and that managerial incentives play an important role in going‐concern reporting.