Changes in theAudit Environment and Auditors’ Propensity to Issue Going-Concern Opinions Neil L. Fargher and Liwei Jiang SUMMARY: The high-profile collapses during the period 2000 to 2002 resulted in in- creased litigation against auditors, higher insurance costs, increased media scrutiny, and increased regulatory review of the auditing profession. Prior research suggests that auditors’ decisions were more conservative after this period. We compare auditors’ propensity to issue going-concern opinions before and after 2000–2002. Consistent with increased auditor conservatism, we find that auditors were more likely to issue going-concern opinions to financially stressed companies immediately after the crisis period. The increase in going-concern modifications issued resulted in a few less com- panies observed to fail without a going-concern modification, but only at the cost of more modifications issued to companies that did not fail. The results do not, however, support continued auditor conservatism beyond 2003. Keywords: going-concern modifications; audit quality; audit environment. Data Availability: Publicly available or commercially available from sources outlined in the text. INTRODUCTION Prior research suggests that auditors can compensate for changes in risk exposure by altering their threshold for issuing modified audit reports e.g., Francis and Krishnan 1999, 2002; Geiger and Raghunandan 2002; Geiger et al. 2005. The high-profile collapses during the period 2000 to 2002 resulted in increased litigation against auditors, higher insurance costs, increased media scrutiny, and increased regulatory review of the auditing profession. In response to these changes in the audit environment during this period auditors would be expected to increase audit effort Neil L. Fargher is a Professor at The Australian National University and Liwei Jiang is a Lecturer at Macquarie University. The authors acknowledge the helpful comments and support from David Bond, Kym Boon, Philip Brown, Thomas Dowdell, Graeme Harrison, Stephane Mahuteau, Gary Monroe, Renee Radich, Herb Schoch, David Simmonds, Mike Wilkins, participants at the AFAANZ 2006 conference, the EISAM 2006 audit quality workshop, the ISAR 2007 confer- ence, and the 2007 AAA Annual Meeting, and research seminar participants at the Australian National University, Uni- versity of New South Wales, Macquarie University, and Monash University. We gratefully acknowledge the research assistance of Katie Fargher. Special thanks are given to the Capital Markets Cooperative Research Centre CMCRC, University of Technology at Sydney, and Professor Donald Stokes for making the data available. Comments from Mike Stein associate editor and two anonymous reviewers are also gratefully acknowledged. Auditing: A Journal of Practice & Theory American Accounting Association Vol. 27, No. 2 DOI: 10.2308/aud.2008.27.2.55 November 2008 pp. 55–77 Submitted: August 2006 Accepted: May 2008 Published Online: March 2009 55