Every now and then when you read through accounts, you come across a "going concern statement'' from the auditors. It's basically a red flag signalling that the company's state is looking terminal. Now to most people, that would seem a fairly straightforward proposition. If the company's books look bad, the statement's made. Right? Think again.
A study has found that a lot of it boils down down to how far the auditor is located from a Securities and Exchange Commission office. The study, The Geography of Auditor Independence and SEC Enforcement, found that the likelihood of issuing a going concern audit report decreases as the distance between the auditor's office and the SEC Regional Office increases. This only applies to non-Big 4 auditors. That's quite significant because non-big 4 auditors tend to perform lower quality audits and are more likely to be censured and punished in SEC enforcement actions. Another important point is that the market share of public clients by non-Big 4 auditors has grown dramatically since Sarbanes-Oxley.
What's the reason? The authors have an interesting explanation, pointing to the old Chinese proverb: "The mountains are high and the emperor is far away."
They write: "If auditors located farther from SEC Regional Offices believe there is less likelihood they will "get caught" in the event of a breach, it decreases the expected costs of compromising their independence: or, to paraphrase an ancient Chinese proverb, the mountains are high and the SEC Regional Office is far (a)way."
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