The information content of interim reviews: Do interim going concern opinions provide

an early warning?

Abstract:
We investigate whether the auditors interim (half yearly) review going concern opinion
(GCO) provides investors with timely and useful information. Using the Australian setting in
which it is mandatory to obtain and disclose an interim review report, we find that the interim
review GCO is a significant predictor of the following annual report audit GCO, providing
incremental information content beyond the previous annual report audit opinion.
Furthermore, we document a strong negative market reaction surrounding the release of an
interim review GCO, suggesting that investors react to the timely release of auditors review
opinions.
Keywords: Review opinions; going concern opinions, interim reviews.
JEL Classifications: G38, M42, M48

1. Introduction
This paper investigates whether interim (half yearly) financial statement reviews provide
timely, useful information to investors. Australian companies must have their interim
financial statements reviewed or audited, and the auditors opinion must be disclosed with the
interim report. The mandatory disclosure of review reports in Australia contrasts with the
U.S., where the disclosure of review reports remains voluntary, and Canada where there are
restrictions on interim review disclosure (Bdard & Courteau 2015). Using a sample of
interim reviews, this study provides descriptive evidence on the incidence of going concern
opinions (GCOs) contained in interim reviews. We then examine whether interim review
GCOs provide investors an early warning of annual report audit GCOs. Last, we investigate
whether investors react to the issuance of interim review GCOs by observing the market
reaction surrounding their announcement.
Prior literature has extensively studied the information content of annual report audits.
However, relatively scant attention has been paid to the effect of the interim review. This is
an important area to examine, as reviews are costly exercises (Ettredge et al. 2000a; Bdard
& Courteau 2015); leading to increased audit fees, and delaying the provision of interim
financial information relative to interim reports with no assurance provided. However,
relative to the assurance provided by a full audit, reviews are designed to improve the
timeliness of useful information (the auditors opinion) to users of the financial statements,
contributing to the effective functioning and integrity of the capital markets. Ettredge et al.
(2000b) find that voluntary timely quarterly reviews are associated with a reduction in the
deferral of adjustments to the fourth quarter. There is also a stronger relationship between
quarterly earnings and stock returns for U.S. listed firms that have voluntary timely reviews
(Manry et al. 2003). Manry et al. (2003) argue that this association is due to timely reviews
ensuring that earnings reflect contemporaneous news and thus do not lag returns. These

results support the claim by the Securities Exchange Commission (SEC) that timely reviews
increase the quality of financial reporting throughout the year. However, Krishnan and Zhang
(2005) find only 8 firms (0.02% of the sample) report non-clean interim review opinions, and
Bdard and Courteau (2015) were unable to find evidence of improved earnings quality for
Canadian firms with voluntarily reviewed interim financial statements.
We utilise the Australian institutional setting, in which firms must mandatorily
disclose interim review opinions. The interim review opinions of the top 500 Australian firms
in 2006 were hand-collected for the period 2006-2010, yielding a final sample of 2035 firmyear observations. First, we provide descriptive evidence that GCOs are issued significantly
more often in interim reviews, than in annual audits. Second, we find that interim review
GCOs are significantly associated with the following annual report GCO, and provide
incremental information content beyond the annual report audit in the prior year. This
suggests that the disclosure of interim review GCOs is useful to investors in providing timely
information that helps forecast the following annual GCO. Finally, we show that investors
react to the issuance of an interim review GCO in a significantly negative manner after
controlling for other financial data announced in the interim report. We infer that the timely
provision of the auditors interim review opinion is useful to investors both in predicting
audit opinions, and in pricing interim financial disclosures.
This paper makes several important contributions to the audit literature. First, we
empirically test whether the issuance of interim review GCOs helps provide timely, useful
and new information to investors and stakeholders. As many markets around the world are
still debating whether the benefits of providing assurance on interim financial statements
outweigh the costs, this paper adds weight to the regulatory debate surrounding the benefits
of interim reviews and directly addresses regulator concerns about earlier identification and
resolution of issues that can affect the quality of financial reporting to investors these

benefits could also improve pricing efficiency of the issuer's securities (SEC 2000). We also
add to the literature by providing descriptive evidence on the propensity and type of issues
that result in going concern review opinions.
The remainder of the paper is structured as follows. Section 2 provides background
information on the institutional setting surrounding interim reviews, reviews prior literature
and develops the hypotheses. Section 3 outlines the sample and describes the research design.
Section 4 reports the results, and Section 5 provides concluding remarks.

2. Institutional setting and hypothesis development

2.1 Institutional setting
Reviews offer a different level of assurance than an audit. The Australian Securities and
Investments Commission (ASIC) describes an audit opinion as expressing whether the
financial statements are prepared in accordance with the financial reporting framework and
are free from material misstatement (ASIC 2015). In contrast, a review expresses whether
anything has come to the auditors attention indicating that the financial statements are not
prepared in accordance with the financial reporting framework. CPA Australia (2014)
describes audits as providing reasonable assurance, and reviews as providing limited
assurance. Both audit, and review opinions, are focused on whether the financial statements
provide a true and fair view and comply with accounting standards.
International harmonisation of accounting standards and auditing processes requires
mandatory disclosure of annual audit reports throughout most of the world. Subsequently,
assurance research has focused on the annual report audit opinion, and its information
content. However, the reporting and assurance of interim reports has not yet been
standardized in the same way. After March 15, 2000, the U.S. SEC required public
companies to have their quarterly financial statements reviewed by their auditor on a timely

basis. 1 However, disclosure of the review report is required only if the company refers to the
review in its 10-Q filings. If such references are not included, the decision to disclose the
report is a voluntary one. The SEC does not require, and most companies do not request, the
issuance of a review report (Krishnan & Zhang 2005). Krishnan and Zhang (2005) find only
5.70% of companies attached the auditors review report in their year 2000-2001 10-Q
filings, of which only 8 firms (0.02%) disclosed a non-clean review opinion. In the UK,
interim reviews are voluntary, however, if a review is conducted, the review report must be
disclosed. While in Canada, the review of interim reporting is voluntary however, even if a
review is conducted, the disclosure of the review report is prohibited. 2
In Australia, amendments in the Corporate Law Reform Act 1994 require listed
companies to release interim (half-yearly) financial statements that must be either reviewed
or audited. 3 The interim financial statements must include the auditors opinion which is
signed by a named partner. An example of a GCO interim review opinion is provided in
Appendix 1. Thus we conclude that Australia is a strong setting to examine the disclosure of
interim review opinions.
2.2 Literature review
Prior literature on interim assurance has found that larger firms, with higher leverage, who
are more profitable, with greater agency costs and stronger audit committees are more likely

Prior to March 15, 2000, publicly traded companies in the U.S. had the option of releasing quarterly financial
information which had been reviewed by an auditor (timely review), or wait until the fiscal year end to have
their prior three quarterly reports reviewed (retrospective review). The SEC encouraged companies to have
financial information reviewed by an auditor at the end of each quarter, but allowed for the deferral of the
review until the end of the year. Ettredge et al. (1994) found less than 8% of sample firms followed the SEC
guidance and chose to purchase a timely review of their quarterly reports in 1987-1989.
2
In Canada the results of the review, must be communicated to the audit committee either orally or in written
form. However, under Canadian GAAS (CICA, section 7050.08) auditors are not allowed to consent that their
report be made public; its distribution is limited to the audit committee. This prohibition implies that neither the
company nor its directors or officers can use the review report for statutory due diligence defense. Accordingly,
exposure to legal liability toward third parties is significantly reduced, limiting the auditors responsibility
(Bdard & Courteau 2015).
3
Baines et al. (2000) find 18 firms out of a sample of 252 firms chose to have their half-yearly financial
statements audited in 1994. Chen et al. (2007) find 2 firms out of a sample of 238 chose to have their half-yearly
financial statements audited in 2003. A negligible number of firms reported an interim audit instead of an
interim review in our sample period.

to have timely reviews or voluntary audits (Ettredge et al. 1994; Baines et al. 2000; Haw et
al. 2008; Mangena & Tauringana 2008; Boritz & Bandyopadhyay 2014). The timely use of
interim reviews in the U.S. is associated with a reduction in the deferral of adjustments to the
fourth quarter (Ettredge et al. (2000b) and a stronger relationship between quarterly earnings
and stock returns (Manry et al. 2003). Thus, there appears to be support for the idea that
timely reviews increase the quality of financial information throughout the year.
International evidence also supports the benefits of reviewing interim financial
reports. Portuguese firms experience a marginally larger investor reaction for reviewed
interim reports, relative to quarterly reports with no assurance Alves and Teixeira Dos Santos
(2008). German firms who review their interim financial reports experience higher abnormal
trading volume surrounding their release than unreviewed interim financial reports (Kajter
et al. 2014). Chinese firms that voluntarily have their interim reports audited, have larger
earnings response coefficients relative to firms with interim reports that provide no assurance
(Haw et al. 2008). Boritz and Bandyopadhyay (2014) find that Canadian firms with a timely
review have quarterly discretionary accruals that are on average significantly lower than unreviewed reports.
However, Bdard and Courteau (2015) find no significant association between the
quality of earnings in interim quarters, or in the fourth quarter, as measured by the level of
absolute unexpected accruals, and whether the interim reports were reviewed by an auditor.
They conclude the review of interim financial reports has no significant beneficial effect on
the quality of interim earnings, nor does it reduce fourth quarter adjustments.
Increased reporting lag and auditing fees represent the major costs of having interim
financial reports reviewed relative to when no interim assurance is provided. Ettredge et al.
(2000a) find a potential cost of requiring timely quarterly reviews is that the quarterly
reporting lag would increase by an average of 3 days, relative to reports with no assurance

provided. Bdard and Courteau (2015) find Canadian firms that voluntarily use timely
reviews have on average 18% higher annual audit fees than firms that provide no interim
assurance.

2.3 Hypothesis development

Our research objective is to examine whether interim assurance; i.e. the half yearly review,
provides timely, useful information to the market. To phrase it another way, does the interim
review provide an early warning about the firms financial position before the annual report
audit opinion? Reviews may not provide useful information, as auditing standards for reviews
(ASRE 2400 and 2410) require a much lower level of evidence gathering relative to
conducting an audit. Therefore, it is of interest to examine the frequency of GCOs contained
in the interim review as opposed to the annual report. As annual audits are conducted to a
higher standard of assurance, there is an expectation that annual audit opinions will contain
higher rates of GCOs compared to half-yearly reviews. Consistent with this, there was an
increase in the rate of GCOs after a change in SAS No. 59 increased auditors responsibilities
in identifying going concern issues as it increased GCOs from when information comes to
his attention that raises a question about an entitys ability to continue in existence (SAS
No. 34, para. 1) to examining the going concern assumption (Carcello et al. 1995;
Raghunandan & Rama 1995). However, due to the conservatism of the auditor in the
presence of less evidence, the lessor influence of a negative review report and the ability for a
firm to clean up their reports by year end, it is possible that going concern review opinions
are issued more frequently than going concern audit opinions. This is consistent with Hatfield
et al. (2011), finding that the auditors prior period influence over audit adjustments, impacts
the magnitude of current proposed audit adjustments.

A different frequency of GCOs in the interim review as opposed to the annual report
audit, suggests that GCOs in the review may, or may not predict the GCO in the annual
report. If the reviewed GCO is associated with the annual report GCO it suggests that reviews
are providing a timely early warning signal about the following audit outcome. Thus, we
provide evidence on the incremental information content of GCOs issued in interim review
reports in providing investors an early warning in being able to predict the annual audit GCO.

H1: Interim review going concern opinions provide incremental information content
to annual report going concern opinions.

Second, we address the information content of interim review GCOs. Several studies
have investigated the market reaction to GCOs released in annual reports. However, due to
the differing audit standards required for an audit and a review, a separate investigation of the
market reaction to review reports adds to the literature on the impact of different assurance
levels (Roebuck et al. 2000; Hasan et al. 2003; Hasan et al. 2005). Elliott (1982) studies
firms receiving subject-to audit qualifications and finds no significant market reaction to
the release of the audit qualification. Dodd et al. (1984) find no evidence that investors react
adversely to audit qualifications, however Dopuch et al. (1986) reports that firms that have
qualified opinions that are reported in the business press experience negative excess returns
around the report date. Jones (1996) observes negative returns around the announcement date
for firms receiving audit GCOs, with the return worsening for more unexpected opinions.
Similarly, Fleak and Wilson (1994) find that firms receiving audit GCOs experience negative
returns when compared with distressed firms receiving unmodified opinions. In contrast,
Blay and Geiger (2001) find a statistically insignificant market reaction to firms receiving
audit GCOs. In a study of 229 Australian firms, Herbohn et al. (2007) find no short-term

market reaction to the release of the annual report containing a GCO. Menon and Williams
(2010) observe a negative excess return when audit GCOs are disclosed. The reaction is more
negative when firms have problems with financing, a going concern triggers debt covenant
violations, and if institutional ownership is higher.
In summary, results are mixed on the question of whether investors react adversely to
the issuance of audit GCOs. We expect a GCO contained in an interim review to result in a
negative investor reaction for two reasons. First, the auditor may provide new information to
investors in the review that is timelier than that contained in the annual report. Second, the
lower standard of assurance provided indicates that any issues found, were more obvious, and
potentially worse than those contained in an audited opinion. Therefore, we ask the question,
if a GCO is disclosed in an interim review, do investors react negatively?

H2: Going concern opinions released in interim reviews are associated with a
negative abnormal market reaction.

3. Research method
3.1 Sample
The largest 500 Australian ASX listed companies based on market capitalisation as at
01/01/2006 were selected to form the sample. We then collected data for sample firms over
2006-2010. To collect half-yearly review data, all midyear financial statements were
downloaded and data on sign off date, audit firm and review opinion was hand collected.
Annual report audit data is collected from Sirca, while both annual and interim financial data
is collected from Aspect Huntley. Table 1 describes the sample selection process. A total of 8
firms had incomplete financial report data in 2006 and were removed. In subsequent years,
firms with missing data were removed, key reasons for missing data include delisting,

mergers, and lack of required data (e.g. Banks and insurance firms are removed from the
sample due to different financial determinants of GCOs). A total sample of 424 firms, and
2,035 firm-year observations remain.

3.2 Predicting audit going concern opinions

We test whether going concern review opinions are more prevalent than going concern audit
opinions. First we identify a sample of going concern review and audit opinions. We then test
if these two samples are significantly different using a Wilcoxon signed rank test. To address
hypothesis 1, we run a logistic regression to classify the determinants of an audit GCO as
shown in equation 1 (time and firm subscripts omitted for convenience):

= 0 + 1 + 2 + 3 +

4 + 5 + 6 + 7 + 8 + 9 + 10 +

11 + 12 + 13 + 14 4 + 15 +

(1)

The dependent variable AnnualAuditGCO is a binary variable equal to 1 when the

annual audit opinion contains a going concern modification and 0 otherwise. The test variable
of interest is InterimReviewGCO, which tests whether the interim review GCO contained in
the interim report released 6 months prior to the annual audit opinion is significantly
associated with the following audit GCO (AnnualAuditGCO). This variable is specified as
InterimReviewGCO = 1 when the interim review contains a GCO, and 0 otherwise. A
significant and positive coefficient is predicted, and would indicate that the disclosure of
interim reviews provides investors with timely and useful information in being able to predict

10

audit opinions. The remaining variables are measured as per the annual report, and are
defined as:
PriorAuditGCO = a binary variable equal to 1 if the prior years annual audit
contained a GCO, and 0 otherwise.
LnTA = the natural log of total assets.
TATL = total assets divided by total liabilities.
CR = current assets divided by current liabilities.
LnCash = the natural log of cash.
ROA = return on assets, calculated as net profit after tax (NPAT) divided by total
assets.
Loss = a binary variable equal to 1 if net profit after tax is less than zero, otherwise
equal to 0.
LnOpRev = the natural log of operating revenue (OpRev)
NegCF = a binary variable equal to 1 if the firm reported a total cash flow less than
zero, otherwise equal to 0.
CFOA = cash flow from operations divided by total assets.
ZScore = Zmijewski Z-score measure of bankruptcy probability. This is based on the
form of the model calculated by Carcello et al. (1995) who use the weightings Zscore
= -4.803 - 3.6*(net profit after tax / total assets) + 5.4*(total liabilities / total assets) 0.1*(current assets / current liabilities).
LnYears = the natural log of the number of years between the company listing date
and annual report balance date.
Big4 = a binary variable equal to 1 if the audit was conducted by either Deloitte, Ernst
and Young, KPMG or PWC, and 0 otherwise.

11

We select our control variables based on prior literature investigating the

predictability of GCOs (DeFond et al. 2002; Carey & Simnett 2006; Knechel & Vanstraelen
2007). LnTA proxies for the size of the firm, and is expected to have a negative coefficient as
larger companies have more bargaining power, and are less likely to fail (Reynolds & Francis
2000; DeFond et al. 2002). TATL measures the leverage of a firm, firms with higher leverage
are riskier, and may be more likely to receive a GCO. Firms with higher current ratios (CR)
and cash balances (LnCash) are better able to pay creditors on time, leading to a negative
association with GCOs. ROA, CFOA and LnOpRev are measures of a firms financial
success. An increasing level of operating revenue, ROA and CFOA is expected to be
negatively associated with going concern modifications. Both Loss and NegCF are expected
to be positively associated with GCOs as they indicate when firms are in trouble and are more
likely to fail (Reynolds & Francis 2000; DeFond et al. 2002). Higher values of ZScore
indicate a higher likelihood of future bankruptcy, and should have a positive association with
GCOs (Carey & Simnett 2006). LnYears represents the age of the firm, as older more
established firms have more bargaining power, they are expected to be less likely to
experience financial distress and to receive GCOs (Dopuch et al. 1987; Carey & Simnett
2006). Big4 is included as prior research suggests that non-big-4 auditors are less likely to
issue audit GCOs (Mutchler et al. 1997; DeFond et al. 2002).

3.3 Market reaction to interim review going concern opinions

We investigate the daily abnormal returns surrounding the disclosure of going
concern review opinions. Using the full sample of firms, an event study is conducted
surrounding the interim financial report release date. We calculate abnormal return (AR) and
cumulative abnormal returns (CAR) as:

12

, =

,1

(, ) = = ,

,1

(2)
(3)

Where , is the abnormal return of firm i at time t, , is the share price of firm i at

time t, , is the price of the All Ordinaries index at time t and CAR is the cumulative

abnormal return from event day q to event day s is the summation of the abnormal returns. 4
We then test whether the abnormal return around the interim review release is significantly
different from zero using Student t-tests. Abnormal returns are calculated for sub-samples
dependent on the interim review GCO to determine if returns differ based on the disclosed
opinion.
To test hypothesis 2, a multivariate analysis of the cumulative abnormal returns
(CAR) is conducted using an OLS regression controlling for announcement day return factors
as shown in Equation 4.

(, ) = 0 + 1 + 2 4 +

3 + 4 + 5 + 6 + 7 + 8 +
9 + 10 + 11 + 12 + 13 4 +

14 +

(4)

Variables in equation 4 are measured as per the interim financial report to reflect
firms most recent financial results, and are defined as above in equation (1). Change ()
variables refer to the change in the variable measurement from the interim report released at
time t, minus the interim report released one year prior at t-1.
4

The All Ordinaries index is a market capitalisation weighted index comprising the largest 500 firms listed on
the Australian Stock Exchange. It is chosen as the market index that most closely resembles our sample
composition.

13

Our variable of interest is InterimReviewGCO, which we hypothesis to have a

significantly negative coefficient, indicating that investors react negatively to the issuance of
a GCO in interim reviews. Next, we interact Big4 with InterimReviewGCO to test whether
the market reaction to a GCO differs based on the size of the audit firm issuing the opinion.
Similarly to other audit report event studies, we acknowledge the event window
surrounding the release of the interim report and auditors review is contaminated with many
other information disclosures (Menon & Williams 2010). We are unable to precisely separate
the effect of the auditors review opinion from the release of other information in the interim
financial report. Despite this, we attempt to control for both the level and changes in key
financial report indicators contained in the balance sheet, profit and loss statement, and cash
flow statement. We expect the market to react in a positive way to the release of news
signalling improved firm performance, and a positive association to be found between ,

, and CAR. However, the reporting of a Loss should be associated with a

significantly negative marker reaction.

4. Results
4.1 Descriptive statistics
Table 2 presents sample descriptive statistics for our sample of 2035 firm-year observations
through the 2006 to 2010 time period. Panel A presents descriptive statistics for binary
variables. Descriptive statistics are presented for firms first from their annual report, and then,
their next interim financial results. Our sample comprises 86 (4.23%) interim review GCOs
(InterimReviewGCO), and 47 (2.31%) annual audit GCOs (AnnualAuditGCO). The majority
of firms of firms get audited (71.89%) or reviewed (73.42%) by Big4 auditors. Nearly a third
of firms report making a Loss in their annual report (33.22%) or interim report (31.20%),
while close to half the sample has a negative change in total cash (NegCF) for the year

14

(40.98%), or six month period (52.68%). Industry descriptive statistics show that the
Australian stock exchange is dominated by firms operating in Materials (26.98%) and
Industrials (14.84%).
Table 2 Panel B presents descriptive statistics for continuous variables; descriptive
statistics are provided at both the annual and next interim report date. The average total assets
(TA) are $2,629bn, however, the median is only $215m showing the skewed size distribution
of Australias largest firms. Additionally, the minimum asset balance of $1.7m represents a
firm that was in the top 500 in 2006, but shrank in size in subsequent years to a size well
outside the top 500 firms. For performance measures, a large difference is reported between
interim and annual results. E.g. Annual NPAT is 71.91% larger than interim NPAT, reflecting
the comparison of twelve months of performance against six months.
Table 2 Panel C provides frequency descriptive statistics regarding the autocorrelation
between interim review, and audit GCOs. Of the 47 audit GCOs contained in the sample, 32
(68.09%), received GCOs in their interim review six months earlier. 5 Only 15 (31.91%) of
the AnnualAuditGCO sample received a GCO and were surrounded by non-GCO interim
reviews opinions. In untabualted results, of the 47 audit GCOs, 18 (38.28%) firms first
received a GCO in the preceding interim review. Thus, for many firms, the first time
investors learn of a firms going concern issues is via the interim review, suggesting the
disclosure of review opinions may provide new, timely information to investors.
Furthermore, 57.45% of observations received another GCO in the following interim review
conducted six months later.
The difference in the issuance frequency of GCOs between the interim review and the
audit is shown in Table 2 Panel D. A Wilcoxon signed rank test shows that GCOs are issued
significantly more often in interim reviews, relative to in annual report audits (p<0.01).

Appendix 2 provides an example of a firm for which this timeline applies.

15

Despite auditing standards requiring auditors to conduct less work in completing a review
relative to an audit, we find that auditors still issue a greater number of GCOs. An
explanation may be that due to the presence of less evidence in forming an opinion, auditors
act in a more conservative fashion. Also, due to the supposed weaker influence of a negative
review report and the ability for a firm to take time to clean up their reports by year end, it
is possible that going concern review opinions are issued more frequently than non-clean
audit opinions as management have time to try and rectify any problems by year end.

4.2 Predicting audit going concern opinions

Table 3 presents the results of the logit regression predicting AnnualAuditGCO. Panel A
displays results without the prior audit and review opinion variables included. LnCash is
negatively associated with receiving a GCO, while reporting a Loss (p<0.01) or negative cash
flow for the year (NegCF p<0.05) is positively associated with AnnualAuditGCO. Consistent
with prior literature, Panel B shows PriorAuditGCO (p<0.01) is a significant predictor of
future audit GCOs.
Table 3 Panel C presents the results of the logit regression for equation 1. The model
has an overall classification accuracy of 97.47% and a Nagelkerke R Square of 0.462. The
test variable of interest InterimReviewGCO is significantly positively associated with
predicting the following audit GCO (p<0.01), and has incremental predictive power over the
prior audit GCO. Consistent with model 1 and model 2, the control variables Loss, NegCF
and PriorAnnualGCO are all significantly positive, while LnCash is negatively associated
with predicting GCOs. Additionally, LnYears is negatively associated with receiving a GCO
(p<0.10), as older firms are less likely to experience financial distress. These results suggests
that the disclosure of interim review opinions can provide investors with a timely warning,

16

and helps provide incrementally useful improvements in the ability to predict GCOs, even
after controlling for the prior annual report audit opinion.

4.3 The market reaction to interim review going concern opinions

Table 4 displays the results of equation 2 and 3 in calculating abnormal returns surrounding
the announcement of interim financial results. Panel A reports results for the full sample of
2,035 observations. Daily results are insignificantly different from zero in the period
subsequent to the release of the interim report. Significant results are only reported in the t-1
to t+1 event window, with a positive CAR of 0.35%. This result is consistent with our
expectation that some firms will release positive, and other firms will release negative news.
On average, we have no expectation of an abnormal return for the full sample of firms. In
untabulated results using absolute abnormal returns, a large significant price reaction to the
release of interim results is observed, suggesting that interim financial reports do contain
relevant, price sensitive information. Panel B reports event study results for the 85
observations with an interim GCO. Negative average abnormal returns are consistently
displayed in the post announcement window, but are only marginally significant from zero at
-4.03% (p<0.10) in the t-5 to t+5 event window. Panel C compares the difference between the
two samples where InterimReviewGCO is equal to 1 or 0. Similarly, consistently negative
average abnormal returns are seen in the post announcement period, however significance is
only marginal for the event windows t-1 to t+3 and t-5 to t+5 with respective cumulative
abnormal returns of -3.40% (p<0.10) and -4.28% (p<0.10). Unreported non-parametric tests
also find qualitatively similar results, with negative median returns being significantly
different from zero in the t-5 to t+5 event window. Overall, parametric and non-parametric
univariate results suggest that firms receiving a GCO in their interim review experience
negative market reactions surrounding the announcement. However, due to the confounding

17

effect of other financial information being released at the same time, significance remains
weak.
Table 5 presents the results of OLS regressions explaining the multivariate
determinants of the abnormal returns as specified in equation 4. Panel A, provides support for
hypothesis 2, as InterimReviewGCO is significantly negatively associated (p<0.01) with the
abnormal returns over the t-5 to t+5 event window after we control for other factors. 6
Significant control variables behave broadly as predicted, with a positive association found
between firms reporting increases in operating performance LnOpRev (p<0.05), CFOA
(p<0.01) and abnormal returns. While a negative association is found between firm size
(LnTA p<0.01), reporting a Loss (p<0.01) and abnormal returns. Larger firms are argued to
have a better information environment, hence less of a surprise surrounding their release of
interim results. Contrary to expectation, ROA is significantly negatively associated (p<0.10)
with abnormal returns surrounding interim reports. Panel A presents results that suggests
investors react to the disclosed interim review report, and that the GCO contained in the
report is valuable to investors. This finding provides further evidence of the benefits of timely
interim review disclosure.
To determine if there is a differential response by investors to opinions issued by a
Big4 auditor, we interact InterimReviewGCO *Big4. Panel B shows the interaction term to be
significantly negative (p<0.01). This suggests that investors have stronger negative reactions
to interim review GCOs when issued by a Big4 auditor. We infer that going concern review
opinions are more important when issued by higher quality auditors. Finally, Panel C displays
results for equation 4, and provides evidence that even after controlling for the
PriorAuditGCO, interim review opinions issued by Big4 auditors provide significantly
incremental information to investors, and are important and timely sources of information.
6

In unreported robustness tests, we also use t-1 to t+1 as the dependent variable. The results stay consistent
among all test variables of interest.

18

The models presented are all significant (p<0.01). The highest variance inflation
factor is 3.570 for InterimReviewGCO , and the highest correlation is 0.533 between CGO
and ROA, thus we conclude that multicollinearity is not a major concern. 7 Overall, we find
strong support for hypothesis 2, as the interim review GCO is negatively associated with
abnormal stock returns. These findings contribute to the literature by providing empirical
support for the conjecture of the SEC that interim reviews could also improve pricing
efficiency of the issuer's securities (SEC 2000).

Conclusion
We investigate the information content of interim review GCOs, by testing if they provide
predictive ability for annual report audit GCOs, and if the market reacts to their disclosure.
We first find that GCOs are expressed at a greater frequency in interim reviews than annual
reports, at 4.23% to 2.31%. A majority of annual audit GCOs are first pre-empted in interim
reviews. In addition, the interim review opinion is a significant predictor of audit opinions,
over and above the information contained in the prior audit opinion. Furthermore, after
controlling for the release of interim financial results, we document a significant negative
market reaction surrounding interim review GCOs. As firms can write contracts with external
parties that require clean audit opinions (e.g. debt covenants), there may be significant
economic consequences for firms who receive a GCO in their annual audit (Menon &
Williams 2010). Our results are consequential in showing the benefits of disclosing interim
review opinions, as improving the ability to predict future audit GCOs may have significant
economic benefits for investors.

In untabulated results, when the model excludes either ROA or CFOA, results stay qualitatively similar.

19

Overall, our results contribute to the assurance literature, in two ways. First we
support prior literature in providing additional evidence on the benefits of interim reviews
(Ettredge et al. 2000b; Manry et al. 2003; Alves & Teixeira Dos Santos 2008). Second, we
are the first study to document the information content contained within interim review
opinions. Prior U.S. and Canadian studies have been unable to observe interim review
opinions due to small sample size (Krishnan & Zhang 2005), and the disclosure being
prohibited (Bdard & Courteau 2015).
In providing evidence regarding the benefits of interim review disclosure, we believe
our results may be of interest to regulators in jurisdictions who are deciding on the costs and
benefits of interim reviews. We provide evidence supporting the SECs conjecture that
interim reviews can provide earlier identification and resolution of issues that can affect the
quality of financial reporting to investors and could also improve pricing efficiency of the
issuer's securities (SEC 2000). To further understand the benefits of interim reviews on audit
quality, future studies may wish to investigate qualified review opinions, and how differential
auditing standards between reviews and audits lead to different detection rates for qualified
financial statements.

20

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22

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42266.htm

23

Appendix:
Appendix 1: An example of an interim review report with a going concern opinion

24

Appendix 2: Examples of disclosed half-yearly review opinions

Company
Report
Auditor
Opinion
Australasian
30 June 2008
Ernst &
Clean
Resources Limited
Annual Report
Young
Australasian
31 December 2008 Ernst &
Inherent uncertainty regarding
Resources Limited
Young
continuation as a going concern.
Interim report
Australasian
30 June 2009
Ernst &
Material uncertainty regarding
Resources Limited
Annual Report
Young
continuation as a going concern
Appendix 2 presents an example in which the interim review was the first time the auditor
issued a going concern modification. Australasian Resources Limited shows a clean opinion
in their 30 June 2008 annual report, followed by a GCO released in the 31 Dec 2008 halfyearly review. This opinion was then also applied in the following 30 June 2009 annual
report audit. This example displays a case in which the disclosure of the interim review
opinion may provide timely information to investors. The non-clean review opinion followed
a clean audit of the prior period, and then predicted the following non-clean audit opinion.

25

Table 1: Sample Selection

Sample Selection

Firms

Initial Sample: Top 500 firms 2006 by Market

Capitalisation
Remove: Firms with no 2006 data
Remove: Observations with missing data 20072010
Remaining sample (2007-2010)

Firm-year
observations

500

2,500

-8
-68

-35
-430

424

2,035

Table 1 presents the sample selection requirements and shows the reasons for dropping firm-year observations.

Table 2: Sample descriptive statistics

Panel A: Binary variables
Variables measured as at the Annual Report
n
AnnualAuditGCO
47
Big4
1463
Loss
676
NegCF
834
Variables measured as at the Interim Report
InterimReviewGCO
86
Big4
1494
Loss
635
NegCF
1072
Industry
ConsumerStaples
90
HealthCare
116
Utilities
24
InformationTechnology
118
Industrials
302
Materials
549
ConsumerDiscretionary
243
Financials
291
Energy
267
TelecommunicationServices
35

%
2.31%
71.89%
33.22%
40.98%
4.23%
73.42%
31.20%
52.68%
4.42%
5.70%
1.18%
5.80%
14.84%
26.98%
11.94%
14.30%
13.12%
1.72%

26

Panel B: Continuous variables

As at the Annual Report
TA (000s)
TATL
CR
Cash (000s)
NPAT (000s)
ROA
OpRev (000s)
CFO
Zscore
Age
As at the Interim Report
TA (000s)
TATL
CR
Cash (000s)
NPAT (000s)
ROA
OpRev (000s)
CFO
Zscore
Age

Mean
2,629,002
10.357
6.963
180,380
138,149
0.011
1,144,883
213,423
-3.512
14.421
Mean
2,730,840
11.296
7.376
177,709
80,362
0.019
619,539
110,035
-3.628
14.921

Median
215,504
2.634
1.894
22,453
11,906
0.043
79,418
15,144
-3.068
9.764
Median
233,278
2.686
1.895
23,447
6,969
0.023
47,775
6,010
-3.085
10.264

Std. Dev.
12,212,206
45.130
31.807
1,132,502
930,765
0.846
5,135,875
1,411,762
4.724
15.007
Std. Dev.
12,532,095
35.787
24.102
937,761
547,703
0.785
2,827,217
781,082
4.150
15.507

Minimum
1,776
0.368
0.033
0.000
-2,516,238
-2.535
-39,100
-5,959,000
-132.836
0.000
Minimum
1,204
0.553
0.021
0.000
-975,134
-1.999
-45
-3,504,000
-128.908
0.500

Maximum
167,250,000
1,567.458
1,189.088
28,516,000
16,582,173
36.014
78,325,635
23,247,473
13.780
130.000
Maximum
167,435,000
943.470
576.462
22,370,000
10,514,611
34.662
43,399,249
18,900,115
7.425
130.500

27

Panel C: Timing of GCOs

PrevInterimGCO
n
AnnualAuditGCO

47 32

68.09%

PrevAnnualGCO
n
%
1
29.79%
4

FollowingInterim
GCO
n
%
2
57.45%
7

FollowingAnnualGCO
n
18

%
38.30%

Surrounded by interim nonGCO?

n
%
15

31.91%

Panel D: Differences in GCO frequency

n
InterimReviewGCO
AnnualAuditGCO
Wilcoxon signed rank test

%
86
4.23%
47
2.31%
4.472 ***

Table 2: presents descriptive statistics for the full sample of firms. Panel A presents the frequency and percentage for binary variables defined as per section 3.2. Panel B
presents the mean, median, standard deviation, minimum and maximum values of all continuous variables as described in section 3.2 TA, Cash, NPAT and OpRev are
reported in thousands. Panel C provides descriptive statistics regarding the timing and frequency of both InterimReviewGCO and AnnualAuditGCO. Panel D tests if the
frequency of going concern opinions issued in interim reviews, and in annual audits is statistically difference using the Wilcoxon signed rank test. Two tailed test of
significance are reported as follows ***= p<0.01, **= p <0.05, and *= p<0.10.

28

Table 3: Multivariate analysis of audit going concern opinions

Variables
InterimReviewGCO
PriorAuditGCO
LnTA
TATL
CR
LnCash
ROA
Loss
LnOpRev
NegCF
CFOA
ZScore
LnYears
Big4
Constant
Industry Controls
Chi-Square
Nagelkerke R2
n

Panel A
Coeff.

0.171
0.004
-0.016
-0.174
0.603
2.038
-0.152
0.641
-1.235
0.168
-0.295
-0.053
-18.323
Yes

Panel B
p-stat

0.337
0.460
0.600
0.003***
0.518
0.000***
0.472
0.046**
0.104
0.241
0.132
0.876
0.998
134.232***
0.291
2021

Coeff.
2.702
0.250
0.004
-0.017
-0.168
0.510
2.085
-0.214
0.738
-0.729
0.131
-0.294
0.091
-19.996
Yes

Panel C
p-stat

0.000***
0.160
0.412
0.598
0.006***
0.507
0.000***
0.330
0.033**
0.306
0.390
0.167
0.804
0.996
171.875***
0.369
2021

Coeff.
2.693
1.458
0.223
0.002
-0.002
-0.154
0.288
1.904
-0.104
0.697
-0.695
0.063
-0.388
0.191
-20.948
Yes

p-stat
0.000***
0.003***
0.242
0.397
0.928
0.018**
0.689
0.000***
0.654
0.063
0.350
0.661
0.090*
0.637
0.997
209.697***
0.462
2021

Table 3 presents logit regression results as specified in Equation 1. The dependent variable is AnnualAuditGCO=1 when the firm received a going concern opinion in their
annual audit, 0 otherwise. Independent variables are as defined in section 3.2. Two-tailed test of significance: *** = less than 0.01, ** = less than 0.05 and * = less than 0.10.

29

Table 4: Univariate market reactions surrounding the release of interim review opinions

t-5
t-4
t-3
t-2
t-1
t-0
t+1
t+2
t+3
t+4
t+5
t-1 to +1
t-1 to 3
t -5 to +5

Mean
0.05%
-0.01%
-0.19%
-0.02%
0.17%
0.04%
0.14%
-0.03%
-0.01%
0.02%
-0.09%
0.35%
0.31%
0.07%

Panel A:

Panel B:

Full Sample

Interim Review GCO=1

(n=2035)
t-stat
0.644
-0.140
-1.896*
-0.194
1.996*
0.347
1.146
-0.397
-0.086
0.194
-0.903
1.918*
1.415
0.234

Mean
0.59%
0.08%
0.04%
-0.13%
0.25%
-1.05%
-0.98%
-0.58%
-0.59%
-0.04%
-1.63%
-1.78%
-2.95%
-4.03%

(n=85)
t-stat
1.022
0.163
0.070
-0.212
0.376
-1.357
-0.600
-0.913
-1.058
-0.063
-2.459**
-0.967
-1.550
-1.659*

Panel C:
Difference between Interim
Review GCO=1 & 0
(n=2035)
Mean
t-stat
0.57%
0.969
0.09%
0.192
0.24%
0.429
-0.12%
-0.194
0.08%
0.125
-1.14%
-1.456
-1.16%
-0.714
-0.57%
-0.888
-0.61%
-1.081
-0.06%
-0.090
-1.61%
-2.402**
-2.22%
-1.203
-3.40%
-1.778*
-4.28%
-1.750*

Table 4 presents univariate event study results surrounding the release of interim financial reports as calculated in equation 2 & 3. Panel A presents event study results for the
full sample of firms and tests if they are significantly different from zero using Student t-tests. Panel B presents event study results for the 85 firms which disclose an interim
review going concern opinion and test if they are significantly different from zero using Student t-tests. Panel C compares the difference in abnormal returns between the
sample of firms who received an InterimReviewGCO=1 and InterimReviewGCO =0. Two-tailed test of significance: *** = less than 0.01, ** = less than 0.05 and * = less
than 0.10.

30

Table 5: Multivariate analysis of interim review going concern opinion abnormal

returns
Panel A
Panel B
Panel C
Coeff. t-stat
Coeff.
t-stat
Coeff. t-stat
(Constant)
-4.553 -2.241**
-4.480
-2.209**
-4.477 -2.207**
InterimReviewGCO -0.038 -2.567***
0.023
0.875
0.019
0.698
ReviewGCO*Big4
-0.089
-2.825*** -0.088 -2.769***
PriorAuditGCO
0.01
0.461
LnTA
-0.007 -3.128***
-0.007
-3.123*** -0.007 -3.117***
LnTA
0.004
0.107
0.002
0.057
0.002
0.059
ROA
0.005
0.788
0.004
0.755
0.004
0.751
ROA
-0.008 -1.951*
-0.008
-1.986**
-0.008 -1.99**
Loss
-0.024 -2.782***
-0.024
-2.801*** -0.024 -2.779***
LnOpRev
0.000
0.137
0.000
0.068
0.000
0.085
LnOpRev
0.196
2.136**
0.195
2.128**
0.195
2.125**
CFOA
-0.042 -1.257
-0.043
-1.264
-0.042 -1.236
CFOA
0.085
3.041***
0.088
3.162***
0.088
3.161***
Big4
0.002
0.268
0.006
0.858
0.006
0.854
Industry Controls
Yes
Yes
Yes
F-stat
2.462***
2.733***
2.617***
Adj R2
0.014
0.018
0.017
n
2003
2003
2003
Variables

Table 5 presents OLS regressions as specified in Equation 4. The dependent variable is ( 5, + 5) as

calculated in equation 2 & 3. Independent variables are as defined in section 3.2 and section 3.3. Two-tailed test
of significance: *** = less than 0.01, ** = less than 0.05 and * = less than 0.10.

31