Auditing: A Journal of Practice & Theory American Accounting Association Vol. 30, No. 2 DOI: 10.2308/ajpt-50002 May 2011 pp. 77–102 The Auditor’s Going-Concern Opinion as a Communication of Risk Allen D. Blay, Marshall A. Geiger, and David S. North SUMMARY: In this study, we examine the proposition that the auditor’s going-concern modified opinion is a valuable risk communication to the equity market that results in a shift of the market’s perception of financially distressed firms. Specifically, our analyses reveal that the market valuation is significantly altered from a focus on both the income statement and balance sheet to a balance sheet-only focus in the year a company receives a first-time going-concern modified opinion. These results hold even after controlling for several common measures of financial distress and when examining a larger control sample of distressed firms. We also document that the market devalues a company’s inventory and places increased weight on cash, receivables, and long-term assets and liabilities as a result of the auditor’s modification. This indicates that the going-concern modification provides incremental information specifically related to abandonment or adaptation risk. Our results provide evidence that the market inter- prets the going-concern modified audit opinion as an important communication of risk that results in a substantial shift in the structure of the market valuation for distressed firms. Keywords: auditor’s opinion; going-concern; value-relevance; financial distress. Data Availability: All data are available from public sources. JEL Classifications: M41; M42. INTRODUCTION T he only public communication mechanism available to external auditors is their audit report. While the efficacy of the audit report, with its standardized wording, has long been an issue of debate (Mautz and Sharaf 1961; American Institute of Certified Public Accountants [AICPA] 1978; Ellingsen et al. 1989), it remains the sole communication mechanism Allen D. Blay is an Assistant Professor at Florida State University. Marshall A. Geiger is a Professor, and David S. North is an Associate Professor, both at the University of Richmond. We gratefully acknowledge helpful comments from W. Robert Knechel (associate editor), the reviewers, Wendy Bailey, Nathan Stuart, and workshop participants at the University of Florida, the University of California, Riverside, the American Accounting Association Annual Meeting, and the AAA Auditing Section Midyear Meeting. Editor’s note: Accepted by Robert Knechel. Submitted: April 2009 Accepted: September 2010 Published Online: May 2011 77