Evidence On The Effect Of Financial Distress On Type II Audit Errors

A Type II audit error is defined as the failure of an auditor to issue a going concern audit opinion for a client that subsequently declares bankruptcy. Prior research studies have examined audit effectiveness (as measured by Type II audit errors) following the Sarbanes-Oxley Act of 2002, and have generally found an increase in the auditors likelihood of issuing going-concern audit opinions. This increase in the auditors likelihood of issuing a going concern opinion post-Sarbanes-Oxley has been interpreted as an increase in the level of auditor conservatism. [For example, see Geiger et al. (2005) and Fargher and Jiang (2008)]. However, prior studies have often limited their analysis of going-concern audit effectiveness to firms that were already in financial distress, and have also failed to specifically address the extent to which varying levels of financial distress affects the auditors propensity to issue a going-concern opinion. This raises the main research questions addressed in this study: Does the relationship between financial distress and the probability of receiving a going-concern differ for distressed versus non-distressed firms, and more importantly, to what extent do varying levels of financial distress affect this relationship? We find that the relationship between financial distress and the probability of receiving a going-concern opinion is not linear, as is assumed in prior studies. Rather, we find that the positive relationship between financial distress and going-concern opinions applies only for certain levels of financial distress. These results have implications both in the interpretation of previous auditing research that has incorporated variables for financial distress, as well as implications for the design and interpretation of future research.

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Corporate Governance Factors and Auditor Going Concern Assessments

Review of Accounting and Finance ◽

10.1108/eb043428 ◽

2005 ◽

Vol 4 (3) ◽

pp. 5-29 ◽

Cited By ~ 9

Author(s):

Susan Parker ◽

Gary F. Peters ◽

Howard F. Turetsky

Keyword(s):

Corporate Governance ◽

Financial Reporting ◽

Financial Distress ◽

Audit Committee ◽

Future Research ◽

Going Concern ◽

Sarbanes Oxley ◽

Auditing Standards ◽

Distressed Firms ◽

The Impact

When making going concern assessments, Statement on Auditing Standards No. 59 (Auditing Standards Board 1988) directs auditors to consider the nature of management's plans and ability to mitigate periods of financial distress successfully. Corporate governance factors reflect attributes of control, oversight, and/or support of management's plans and actions intended to overcome financial distress. Correspondingly, this study investigates the impact of certain corporate governance factors on the likelihood of a going concern modification. Using survival analysis techniques, we examine a sample of 161 financially distressed firms for the time period 1988–1996. We find that auditors are twice as likely to issue a going concern modification when the CEO is replaced. We also find that going concern modifications are inversely associated with blockholder ownership. We also confirm Carcello and Neal's (2000) findings with respect to the association between an independent audit committee and an increased likelihood of modification. In a repeated events setting, we find that insider ownership and board independence are inversely associated with repeated going concern modifications. Our study concludes by proposing implications for the current financial reporting environment (including the Sarbanes‐Oxley Act of 2002) and future research avenues.

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The Auditor's Going-Concern Opinion as a Communication of Risk

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-50002 ◽

2011 ◽

Vol 30 (2) ◽

pp. 77-102 ◽

Cited By ~ 49

Author(s):

Allen D. Blay ◽

Marshall A. Geiger ◽

David S. North

Keyword(s):

Financial Distress ◽

Balance Sheet ◽

Control Sample ◽

Data Availability ◽

Market Valuation ◽

Audit Opinion ◽

Going Concern ◽

Income Statement ◽

Going Concern Opinion ◽

Distressed Firms

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 interprets 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. Data Availability: All data are available from public sources. JEL Classifications: M41.

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A Study of the Relationship between a Going Concern Opinion and Its Financial Distress Metrics

Journal of Emerging Technologies in Accounting ◽

10.2308/jeta-51933 ◽

2017 ◽

Vol 14 (2) ◽

pp. 17-28 ◽

Cited By ~ 3

Author(s):

Vikram Desai ◽

Joung W. Kim ◽

Rajendra P. Srivastava ◽

Renu V. Desai

Keyword(s):

Search Engine ◽

Financial Distress ◽

Primary Objective ◽

Financial Viability ◽

Going Concern ◽

Going Concern Opinion ◽

One Year ◽

The Impact ◽

First Time ◽

The Relationship

ABSTRACT The primary objective of this paper is to employ search engine technology to investigate the relationship between first-time going concern opinions (GCOs) and the financial viability of the GCO recipients using delisting as a criterion rather than bankruptcy. The paper also investigates the impact of client distress factors on auditors' propensity to issue GCOs. The search engine enables us to examine the entire population of 10-K filings from 1995 to 2015 and also to obtain delisting data, which are not readily available in commercial databases. Contrary to prior research, we find that the survival rate of first-time GCOs is much lower when we use delisting as a measure of financial viability. Around 26 percent of the companies that receive their first GCOs are delisted within a period of one year of the audit opinion date, and 50 percent of the companies that receive their first GCOs are delisted within a period of three years. The bankruptcy rate of first-time GCO companies within one year is around 9 percent. Such evidence may prove useful to the PCAOB's effort to expeditiously assess the intended benefit of GCOs. In addition, we find that the propensity of auditors to issue GCOs varies for each distress factor.

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Auditor Differentiation, Mitigating Management Actions, and Audit-Reporting Accuracy for Distressed Firms

Auditing A Journal of Practice & Theory ◽

10.2308/aud.2011.30.1.1 ◽

2011 ◽

Vol 30 (1) ◽

pp. 1-20 ◽

Cited By ~ 37

Author(s):

Liesbeth Bruynseels ◽

W. Robert Knechel ◽

Marleen Willekens

Keyword(s):

Financial Distress ◽

Manufacturing Industries ◽

Short Term ◽

Industry Specialization ◽

Reporting Accuracy ◽

Going Concern ◽

Management Actions ◽

Audit Firms ◽

Going Concern Opinion ◽

Distressed Firms

SUMMARY: In this paper we examine whether there is auditor differentiation through industry specialization and audit methodology in judging the adequacy of mitigating management actions as implemented by financially distressed companies. Using a sample of U.S. companies from manufacturing industries (SIC 20–39) that went bankrupt between 1999–2002, we find evidence that specialist auditors are more likely to issue a going-concern opinion for soon-to-be bankrupt companies when management undertakes strategic turnaround initiatives, relative to non-specialist auditors. Interestingly, and counter to our expectations, we find that audit firms that use a business risk audit methodology are less likely to issue a going-concern opinion for a firm that subsequently goes bankrupt if the client has undertaken operating initiatives to mitigate financial distress. Finally, we also find very strong evidence that all auditors, irrespective of type, are less likely to issue a going-concern opinion for clients that subsequently go bankrupt when the client has plans to raise cash in the short term.

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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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The effect of real activities manipulation on going concern audit opinions for financially distressed companies

Review of Accounting and Finance ◽

10.1108/raf-09-2016-0135 ◽

2018 ◽

Vol 17 (4) ◽

pp. 514-539

Author(s):

Hongkang Xu ◽

Mai Dao ◽

Jia Wu

Keyword(s):

Audit Quality ◽

Positive Association ◽

Content Type ◽

Going Concern ◽

Accruals Management ◽

Reporting Decisions ◽

Going Concern Opinion ◽

Distressed Firms ◽

Real Activities Manipulation ◽

Auditor Reporting

Purpose This study aims to examine the effect of real activities manipulation (RAM) on auditors’ decision of issuing going concern (GC) opinions for distressed companies. Design/methodology/approach This study estimates and examines three types of RAM: reduction of discretionary expenses, sales manipulation and overproduction. It investigates the effect of RAM on auditor reporting conservatism by including the three measures of RAM methods in logistic regressions that explain the issuance of going concern opinions. The authors perform the analysis specifically on distressed firms for 2004-2013 period. Findings This study finds a significant and positive association between RAM and the likelihood of receiving going concern opinion in the financial distressed firm sample, suggesting that client’s abnormal business activity affects the auditor reporting conservatism. Practical implications This study provides evidence that auditors make going concern reporting decisions in consideration of the client’s abnormal operating decisions and management’s opportunism. Originality/value Recent literature argues that auditors have little recourse other than to resign if a client uses RAM to impact earnings or the financial statements, and hence the enhanced audit quality in the post-SOX period is due to the shift from using accruals management to RAM (Cohen et al., 2008; Chi et al., 2011; Kim and Park, 2014). The evidence provided in this study indicates that auditors report more conservatively (rather than simply resign) in response to the aggressive RAM.

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Pengaruh Rasio Profitabilitas, Rasio Likuiditas, Pertumbuhan Perusahaan Terhadap Opini Audit Going Concern

Jurnal Akuntansi Maranatha ◽

10.28932/jam.v13i2.3901 ◽

2021 ◽

Vol 13 (2) ◽

pp. 283-299

Author(s):

Kimberli Kimberli ◽

Budi Kurniawan

Keyword(s):

Stock Exchange ◽

Secondary Data ◽

Financial Statements ◽

Audit Opinion ◽

Going Concern ◽

Analysis Technique ◽

Going Concern Opinion ◽

Company Growth ◽

The Relationship ◽

Profitability Ratios

Abstract The problems that will be discussed in this journal are regarding the relationship between Profitability Ratios, Liquidity Ratios and Company Growth on Audit Delay. The research method used in this study uses secondary data. The population in this study is all Real Estate companies and the Property sub-sector registered on the BEI which are listed on the Indonesia Stock Exchange in 2017, 2018, 2019 and 2020. The sampling method in this study is purposive sampling. The criteria for companies that are sampled are companies that publish audited financial statements for four consecutive years and use the rupiah currency, so that the total number of samples in this study is 165 data. The independent variables in this study are Profitability Ratios, Liquidity Ratios and Company Growth. The dependent variable in this study is audit delay. The data analysis technique used is the Logistics Regression Test with the use of Software Eviews 10. The results of the analysis show that profitability has no significant effect on going concern audit opinion. Meanwhile, company growth and liquidity have no effect on going concern audit opinion. Keywords: Going Concern Opinion, Profitability, Liquidity, and Company Growth

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KEMAMPUAN PERGANTIAN AUDITOR DAN PRIOR OPINION MEMODERASI PENGARUH POTENSI FINANCIAL DISTRESS TERHADAP OPINI GOING CONCERN

E-Jurnal Ekonomi dan Bisnis Universitas Udayana ◽

10.24843/eeb.2017.v06.i09.p03 ◽

2017 ◽

pp. 3259

Author(s):

Putu Yudha Asteria Putri ◽

Ida Bagus Putra Astika ◽

Made Gede Wirakusuma

Keyword(s):

Empirical Evidence ◽

Financial Distress ◽

Stock Exchange ◽

Secondary Data ◽

Manufacturing Companies ◽

Potential Influence ◽

Going Concern ◽

Going Concern Opinion ◽

Prior Opinion ◽

Contingency Approach

This study aimed to get empirical evidence the auditor's ability to change and prior opinion in moderating influence on the potential financial distress Award going concern opinion. There’s a going concern opinion because the company indicated no longer able to carry out its life. The results of previous studies get inconsistent results in terms of the potential influence on the provision of financial distress going concern opinion. The existence of a contingency approach can be completed in this study, where the variables change of auditor and prior opinion allegedly moderating influence on the potential financial distress Award going concern opinion. This study uses secondary data. Manufacturing companies listed in Indonesia Stock Exchange period 2009-2015 the population in this study by the amount total of the samples are 77 samples were selected by purposive sampling.

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Nonprofit branding: a bibliometric analysis

Journal of Product & Brand Management ◽

10.1108/jpbm-05-2019-2366 ◽

2020 ◽

Vol 29 (5) ◽

pp. 655-673 ◽

Cited By ~ 1

Author(s):

Lara Mendes Christ Bonella Sepulcri ◽

Emerson Wagner Mainardes ◽

Cícero Caldeira Belchior

Keyword(s):

Bibliometric Analysis ◽

Brand Management ◽

Stakeholder Management ◽

Nonprofit Sector ◽

Future Research ◽

Content Type ◽

Main Research ◽

For Profit ◽

Research Areas ◽

The Relationship

Purpose This study aims to examine articles on nonprofit branding over an 18-year time span to develop an overview and better understanding of the subject. Design/methodology/approach This study used the Scopus database in a search for studies that deal, regardless of the approach, with branding in a nonprofit context. Subsequently, through a systematic review, a database with 84 articles was generated and 77 articles were submitted to bibliometric analysis. Findings This study identified six main research areas (brand and donation, brand management, brand orientation, nonprofit and for-profit partnership, communication strategies and stakeholder management), which were analyzed and discussed, seeking to identify the relationship between research in each area. In addition, this study presents the limitations of the research and thus verify that, although this body of literature is growing, the complexity of the nonprofit sector offers several opportunities for future research, which are pointed out at the end of the study. Practical implications This study contributes to the academic literature on the topic by providing a systematization of knowledge about branding in the nonprofit sector and also offers insights about nonprofit branding to institutions and managers in this industry. Originality/value This is the first study, to the authors’ knowledge, to evaluate and quantify the progress of brand literature in the nonprofit sector.

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