Auditors Hesitate to Warn About Failing Firms When the Warning Itself Could Cause the Failure

When an auditor doubts that a company can stay in business for another year, the audit report says so. That statement is called a going concern opinion. It is meant to protect investors and lenders. It also carries a risk that practitioners and regulators have worried about for decades. The warning can scare off customers, suppliers, and creditors, and so help cause the collapse it predicts. Accountants call this the self-fulfilling prophecy effect.

A study by Mikhail Sterin, associate professor of accounting, with Nathan R. Berglund of Mississippi State University, asks whether auditors and their clients act on that worry. Published in the Journal of Accounting, Auditing & Finance, it finds that they do.

The study

Earlier work on the self-fulfilling prophecy effect relied on theory and on experiments with auditors. This study uses archival data on financially distressed companies instead. For each audit engagement, the researchers estimate how much a going concern opinion would be expected to raise that particular client’s chance of failing. That expected effect varies a great deal from one distressed company to the next.

The researchers then test whether the size of the expected effect predicts what auditors and managers do.

What the researchers found

Auditors are less likely to issue a going concern opinion when the opinion is expected to increase the probability that the client fails. In other words, the warning is most likely to be withheld in the cases where it would do the most damage.

The reluctance is not uniform. Larger audit firms show less of it. The authors do not claim to explain why in the abstract, but larger firms typically have more resources, more reputational exposure, and more independence from any single client.

Clients react as well. The expected self-fulfilling prophecy effect is associated with management’s decisions to switch auditors and with which auditor they choose next. Companies that would be hurt most by a warning appear to take that into account when selecting who audits them.

What it means for boards, investors, and regulators

For investors and lenders, the finding is a caution about reading silence as safety. A distressed company without a going concern opinion may simply have an auditor who judged the warning too dangerous to issue.

For audit committees, the results point to a question worth asking during auditor selection: is the choice being shaped by how a candidate firm is expected to handle a going concern decision?

For regulators, the paper supplies archival evidence on a concern that has long been debated without much data. It shows that the fear of causing failure is not just a hypothetical. It is visible in auditors’ opinions and in clients’ hiring decisions.

This summary is based on the paper’s abstract. The full article reports the data, methods, and detailed results.

What it means for managers

• Expect the warning to be softer where it would hurt most. Auditors are less likely to issue a going concern opinion when the opinion itself is expected to raise the odds of failure.
• Firm size changes the calculus. Larger audit firms show less of this reluctance, so the same distressed company may get a different opinion depending on who audits it.
• Clients respond too. Managers' decisions to switch auditors and which auditor to hire are associated with how much a going concern warning would hurt them.

Berglund, N. R., & Sterin, M. (2026). Do auditors and clients respond to the expected self-fulfilling prophecy effect of going concern opinions? Journal of Accounting, Auditing & Finance, 41(3), 1008-1040. 10.1177/0148558X251358521