Conservatism of the Big Six Audit Firms and Going-Concern Modified Audit Reports (Manuscripts‪)‬

ABSTRACT This study examines whether Big 6 audit farms exhibit a more conservative reporting posture than non-Big 6 audit firms by examining differences in "reporting errors "for going concern uncertainties. Specifically, based on an analysis of relative error costs, we hypothesize that Big 6 firms are more conservative in their reporting decisions, leading to differences in error proportions for both type 1 (companies receiving going-concern modified opinions that do not fail) and type II (failed companies that did not receive a prior going-concern modification) reporting errors. Evidence from samples of companies with first-time going-concern modified opinions and bankrupt companies is generally consistent with the hypotheses. Big 6 firms were found to have a significantly higher type I reporting error rate when failure was defined as filing for bankruptcy or entering default on debt payments, and a significantly lower type II reporting error rate than non-Big 6 firms. Our findings suggest that reporting decisions are associated with the relative magnitude of the firms' expected losses, resulting in more conservative reporting decisions regarding the issuance of going -concern modified audit reports for Big 6 firms.