An Opinion On Independent Auditors Opinions Of Substantial Doubt: A SOX-2002 Efficiency Evaluation

Abstract

Given the recent events involving allegations of ethical misconduct by corporate executives and oversight neglect from the auditing community, the government was motivated to implement national reform to minimize the continued threat of corporate malfeasance. Due to the severity of these corporate scandals, Congress mandated and the President signed into law the Sarbanes-Oxley Act of 2002 (SOX-2002) to affect sweeping corporate disclosure and financial reporting reform to thwart continued scrupulous activities. In light of these events, the motivation of this study is to examine the effects of SOX-2002 in empowering independent auditors to provide unbiased opinions of an entity’s ability to remain as a going concern. The uniqueness of this study is that it attempts to determine if substantial doubt opinions signal bankruptcy greater than the chance occurrence of these events. If true, then these early warnings could be used to minimize the costs of bankruptcy. This study suggests that these opinions do signal bankruptcy filings greater than chance, which supports the position of auditor empowerment in a post-SOX-2002 period.