Auditor's dilemma

Among the ways to lose a boxing match is the moment the referee intervenes, looks into the glassy eyes of a pummeled competitor, and stops the fight on a TKO, or technical knockout.

Auditors evaluating distressed companies can be a lot like that ref, but with one crucial difference. There’s no auditing tool like a TKO that halts an ongoing struggle. All an auditor can do when a company is on the ropes is look ringside and declare a GCO, or going concern opinion.

Declaring a GCO is a statement by the auditor that a company is at serious risk of going bankrupt in the next 12 months. It’s a declaration no company wants.

Marshall Geiger, CSX Chair of Management and Accounting in the Robins School of Business, has been looking at the factors that influence how auditors make this call. By comprehensively analyzing the results of 150 studies over the last six years, he’s reached one oft-overlooked conclusion: Auditors are people, too.

“I was surprised to find that auditors are sometimes influenced by others’ GCO decision-making,” said Geiger, whose research was funded by a grant from the Foundation for Audit Research. “If everyone around me is giving more, I’ll give more. If they’re giving fewer, I’ll give fewer.”

In addition to trend-following, auditors also have a human tendency to average a company’s strengths and weaknesses — “less negative information tempers really awful negative information,” as he puts it.

The goal of studying these human factors is more accurate audits to better signal when companies are likely to go down for the count.