Audit Engagement Risk and the Propensity of Issuing Going-Concern Opinion – Does Audit Firm Tenure Matter?

The purpose of this study is to examine auditor’s concervatism in term of their reaction to client’s earnings management behavior and their limitations to issue the going concern opinions (GCO). The population of this study consists of 672 observations from 69 companies are listed on the Indonesia Stock Exchange (BEI) during 2012-2017. The author used the modified Jones model to measure discretionary accruals as a proxy of earnings management. The results of this study indicate that size of audit firm has a positive effect to discretionary accrual. Companies that have been audited by the Big4 tend to apply discretionary accrual in their financial reporting than companies audited by Non-Big4. Further, to strenghten the first hypothesis, we examine the effect of discretionary accruals and going concern opinion on companies that audited by audit firms Big4 lower than companies that audited by audit firms Non-Big4. We found that the result is consistent with the first hypothesis. Keywords : auditor reputation, discretionary accruals, going concern opinion, audit firm ABSTRAK Tujuan dari penelitian ini adalah untuk menguji konservatisme auditor dalam hal reaksi auditor terhadap akrual diskresioner yang dilakukan oleh perusahaan dan keterbatasan auditor untuk menerbitkan opini Going Concern (GC). Populasi penelitian terdiri dari 672 pengamatan dari 69 perusahaan yang terdaftar di Bursa Efek Indonesia (BEI) selama tahun 2012-2017. Penulis menggunakan model modifikasi Jones untuk mengukur akrual diskresioner sebagai proksi manajemen laba. Hasil dari penelitian ini menjelaskan bahwa ukuran kantor akuntan publik berpengaruh positif terhadap akrual diskresioner, hal tersebut diperkuat dengan pengaruh akrual diskresioner dan opini audit going concern yang diaudit oleh kantor akuntan publik Big4 lebih rendah dari perusahaan yang tidak diaudit oleh kantor akuntan publik Non-Big4. Kata kunci : reputasi auditor, akrual diskresioner, opini audit going concern, kantor akuntan publik

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Audit firm characteristics and Type II errors in the going concern opinion

Asia-Pacific Journal of Accounting & Economics ◽

10.1080/16081625.2002.10510599 ◽

2002 ◽

Vol 9 (1) ◽

pp. 39-69 ◽

Cited By ~ 8

Author(s):

Kimberly A. Dunn ◽

Christine E. L. Tan ◽

Elizabeth K. Venuti

Keyword(s):

Type Ii ◽

Firm Characteristics ◽

Audit Firm ◽

Going Concern ◽

Going Concern Opinion ◽

Type Ii Errors

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Threats to Auditor Independence: The Impact of Relationship and Economic Bonds

Auditing A Journal of Practice & Theory ◽

10.2308/aud.2011.30.1.121 ◽

2011 ◽

Vol 30 (1) ◽

pp. 121-148 ◽

Cited By ~ 78

Author(s):

Ping Ye ◽

Elizabeth Carson ◽

Roger Simnett

Keyword(s):

Audit Quality ◽

Joint Effect ◽

Auditor Independence ◽

Audit Firm ◽

Going Concern ◽

Long Duration ◽

Going Concern Opinion ◽

Negative Effect ◽

Nonaudit Services ◽

The Impact

SUMMARY: This study examines the association of a comprehensive set of auditor-client relationship bonds (audit firm tenure, audit engagement partner tenure, long duration director-auditor relationships, and alumni affiliation) with the level of economic bonds provided to an audit client (nonaudit services [NAS]). We further examine the effect of these economic and relationship bonds on auditor independence in the context of nonaudit services fees and the propensity to issue going-concern opinions. It is these economic and relationship bonds that have attracted the interest of regulators in their consideration of audit quality. This study was undertaken in Australia in 2002, which provided a context in which all these relationships could be examined before new regulations were introduced. Results show that audit firm tenure and alumni affiliation are associated with clients purchasing auditor-provided NAS, with stronger associations for clients with low agency costs. We further find that long audit engagement partner tenure and a joint effect of auditor-provided NAS and alumni affiliation have a negative effect on the auditor’s propensity to issue a going-concern opinion.

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Going-Concern Opinions, Auditor Switching, and the Self-Fulfilling Prophecy Effect Examined in the Regulatory Context of Belgium

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x0301800204 ◽

2003 ◽

Vol 18 (2) ◽

pp. 231-254 ◽

Cited By ~ 44

Author(s):

Ann Vanstraelen

Keyword(s):

Debt Financing ◽

The Self ◽

Audit Firm ◽

Empirical Results ◽

Going Concern ◽

Auditor Switching ◽

The Third ◽

Going Concern Opinion ◽

Probability Of Bankruptcy ◽

Going Concern Reports

Previous studies have demonstrated that auditors are reluctant to issue going-concern opinions. Some suggest this reluctance is strategic and stems from the auditor's desire to avoid loss of clients or reputation. This paper investigates the threat of loss resulting from auditor switching and client bankruptcy in the regulatory context of Belgium. Belgium requires companies to engage an audit firm for a three-year period. Consequently, the client's threat of switching auditors is potentially more credible in the third year than in the first two years. The empirical results support the hypothesis that going-concern opinions significantly increase the probability of bankruptcy. Thus, going-concern reports remain relevant even in a country where debt financing is dominant. In addition, clients are four times more likely to switch auditors at the end of the mandatory term if they receive a going-concern opinion in the final year of the term relative to the previous two years. This strongly suggests that mandatory terms influence the association between going-concern opinions and auditor switching.

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The Going Concern Opinion: A Time for a Referendum?

SSRN Electronic Journal ◽

10.2139/ssrn.1579785 ◽

2010 ◽

Cited By ~ 3

Author(s):

Igor Pustylnick ◽

Vicki Anderson ◽

John H. Nugent

Keyword(s):

Going Concern ◽

Going Concern Opinion

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Fraud Risk Awareness and the Likelihood of Audit Enforcement Action

Accounting Horizons ◽

10.2308/acch-51490 ◽

2016 ◽

Vol 30 (3) ◽

pp. 379-392 ◽

Cited By ~ 14

Author(s):

Jared Eutsler ◽

Erin Burrell Nickell ◽

Sean W. G. Robb

Keyword(s):

Financial Reporting ◽

Financial Distress ◽

Professional Community ◽

Securities And Exchange Commission ◽

Counterfactual Reasoning ◽

Going Concern ◽

Enforcement Action ◽

Fraud Risk ◽

Regulatory Perspective ◽

Going Concern Opinion

SYNOPSIS Prior research indicates that issuing a going concern opinion to financially stressed clients generally reduces the risk of litigation against the auditor following a bankruptcy (Kaplan and Williams 2013; Carcello and Palmrose 1994). However, we propose that a going concern report may indicate prior knowledge of financial distress, an important fraud risk factor, and this may have repercussions for the auditor if a fraud is subsequently uncovered. Consistent with counterfactual reasoning theory, experimental research suggests that a documented awareness of fraud risk actually increases the likelihood of litigation against the auditor following a fraud (Reffett 2010). This concern has been echoed by the professional community (AICPA 2004; Golden, Skalak, and Clayton 2006) and may be exacerbated by the current outcome-based regulatory environment (Peecher, Solomon, and Trotman 2013). To examine this issue we review Auditing and Accounting Enforcement Releases (AAERs) issued by the Securities and Exchange Commission (SEC) for alleged financial reporting frauds between 1995 and 2012. Results suggest that going concern report modifications accompanying the last set of fraudulently stated financials are associated with a greater likelihood of enforcement action against the auditor. This finding is consistent with counterfactual reasoning theory and suggests that, from a regulatory perspective, auditors may be penalized for documenting their awareness of fraud risk when financial statements are later determined to be fraudulent.

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Consequences of Going-Concern Opinion Inaccuracy at the Audit Office Level

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-18-050 ◽

2020 ◽

Vol 39 (3) ◽

pp. 185-208

Author(s):

Qiao Xu ◽

Rachana Kalelkar

Keyword(s):

Market Share ◽

Audit Quality ◽

Type I ◽

Type I Errors ◽

Negatively Associated ◽

Going Concern ◽

Big 4 ◽

Office Market ◽

Going Concern Opinion ◽

Office Level

SUMMARY This paper examines whether inaccurate going-concern opinions negatively affect the audit office's reputation. Assuming that clients perceive the incidence of going-concern opinion errors as a systematic audit quality concern within the entire audit office, we expect these inaccuracies to impact the audit office market share and dismissal rate. We find that going-concern opinion inaccuracy is negatively associated with the audit office market share and is positively associated with the audit office dismissal rate. Furthermore, we find that the decline in market share and the increase in dismissal rate are primarily associated with Type I errors. Additional analyses reveal that the negative consequence of going-concern opinion inaccuracy is lower for Big 4 audit offices. Finally, we find that the decrease in the audit office market share is explained by the distressed clients' reactions to Type I errors and audit offices' lack of ability to attract new clients.

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The Relation between Managerial Ability and Audit Fees and Going Concern Opinions

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-50985 ◽

2014 ◽

Vol 34 (3) ◽

pp. 139-160 ◽

Cited By ~ 75

Author(s):

Gopal V. Krishnan ◽

Changjiang Wang

Keyword(s):

Empirical Evidence ◽

Audit Fees ◽

Managerial Ability ◽

Firm Level ◽

Going Concern ◽

Going Concern Opinion ◽

Corporate Resources ◽

Ability Measure

SUMMARY While prior research has examined the relation between firm-level attributes and auditors' decisions, there is little empirical evidence on whether managerial attributes are informative to auditors. We examine the relation between managerial ability, i.e., ability in transforming corporate resources to revenues, and audit fees and a going concern opinion. We use the managerial ability measure recently developed by Demerjian, Lev, and McVay (2012). We find that incremental to firm-level attributes, both audit fees and the likelihood of issuing a going concern opinion are decreasing in managerial ability. Collectively, our findings support the notion that managerial ability is relevant to auditors' decisions.

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