Fraud Risk Awareness and the Likelihood of Audit Enforcement Action

2016 ◽  
Vol 30 (3) ◽  
pp. 379-392 ◽  
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.

The Impact of Going Concern on Financial Reporting Quality: Evidence from Vietnam

2018 ◽  
Vol 34 (3) ◽  
Author(s):  
Phung Anh Thu ◽  
Nguyen Vinh Khuong
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Financial Distress ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Viet Nam ◽  
Listed Firms ◽  
Going Concern ◽  
Debt Covenant

The investigation was conducted to contribute empirical evidence of the association between going concern and financial reporting quality of listed firms on the Vietnam stock market. Based on data from 279 companies listed on the HNX and HOSE exchanges in Vietnam for the period 2009-2015, the quantitative research. Results found that the relationship between the going concern and financial reporting quality of listed firms. Research results are significant for investors, regulators to the transparency of financial reporting information. Keywords Going concern, financial reporting quality, listed firms References Agrawal, K., & Chatterjee, C. (2015). Earnings management and financial distress: Evidence from India. Global Business Review, 16(5_suppl), 140S-154S.Bergstresser, D., & Philippon, T. (2006). CEO incentives and earnings management. Journal of Financial Economics, 80(3), 511–529.Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, 24(1), 99–126.Charitou, A., Lambertides, N., & Trigeorgis, L. (2007a). Earnings behaviour of financially distressed firms: The role of institutional ownership. Abacus, 43(3), 271–296.Chen, Y., Chen, C., & Huang, S. (2010). An appraisal of financially distressed companies’ earnings management: Evidence from listed companies in China. Pacific Accounting Review, 22(1), 22–41Dechow, P., & Dichev, I. (2002). The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors. The Accounting Review, 77, 35-59.DeFond, M., & Jiambalvo, J. (1994). Debt covenant violation and manipulation of accruals. Journal of Accounting and Economics, 17(1), 145–176.DeFond, M.L., & Park, C.W. (1997). Smoothing income in anticipation of future earnings. Journal of Accounting and Economics, 23(2), 115–139.Dichev, I., & Skinner, D. (2004). Large sample evidence on the debt covenant hypothesis. Journal of Accounting Research, 40(4), 1091–1123.Đinh Thị Thu T., Nguyễn Vĩnh K. (2016). Tác động của hành vi điều chỉnh thu nhập đến khả năng hoạt động liên tục trong kế toán: Nghiên cứu thực nghiệm cho các doanh nghiệp niêm yết tại Việt Nam, Tạp chí phát triển khoa học và công nghệ, Quí 3, tr.96-108.Đỗ Thị Vân Trang (2015). Các mô hình đánh giá chất lượng báo cáo tài chính, Tạp chí chứng khoán Việt Nam, 200, tr 18-21.Habib, A., Uddin Bhuiyan, B., & Islam, A. (2013). Financial distress, earnings management and market pricing of accruals during the global financial crisis. Managerial Finance, 39(2), 155-180.Jaggi, B., & Lee, P. (2002). Earnings management response to debt covenant violations and debt restructuring. Journal of Accounting, Auditing & Finance, 17(4), 295–324.Kasznik, R., (1999). On the association between voluntary disclosure and earnings management. Journal of accounting research, 37(1), pp.57-81.Lu, J. (1999). An empirical study of earnings management by loss-making listed Chinese companies. KuaijiYanjiu (Accounting Research), (9), 25–35.McNichols, M.F. and Stubben, S.R., (2008). Does earnings management affect firms’ investment decisions?. The accounting review, 83(6), pp.1571-1603.Selahudin, N.F., Zakaria, N.B., & Sanusi, Z.M. (2014). Remodelling the earnings management with the appear- ance of leverage, financial distress and free cash flow: Malaysia and Thailand evidences. Journal of Applied Sciences, 14(21), 2644–2661.Skinner, D.J., & Sloan, R. (2002). Earnings surprises, growth expectations, and stock returns or don’t let an earnings torpedo sink your portfolio. Review of Accounting Studies, 7(2/3), 289–312.Sweeney, A.P., (1994). Debt-covenant violations and managers' accounting responses. Journal of Accounting & Economics, 17(3): 281-308.Trần Thị Thùy Linh, Mai Hoàng Hạnh (2015). Chất lượng báo cáo tài chính và kỳ hạn nợ ảnh hưởng đến hiệu quả hoạt động của doanh nghiệp Việt Nam, Tạp chí phát triển kinh tế, 10, tr.27-50.Trương Thị Thùy Dương (2017). Nâng cao chất lượng báo cáo tài chính công ty đại chúng, Tạp chí tài chính, 1(3), tr.55-56.Uwuigbe, Ranti, Bernard, (2015). Assessment of the effects of firm’s characteristics on earnings management of listed firms in Nigeria, Asian Economic and Financial Review,5(2):218-228.

UKURAN KANTOR AKUNTAN PUBLIK, DISCRETIONARY ACCRUALS DAN OPINI AUDIT GOING CONCERN

2019 ◽  
Vol 15 (1) ◽  
pp. 11
Author(s):  
Ravaela Amba Masiku ◽  
Christine Novita Dewi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Stock Exchange ◽  
Discretionary Accruals ◽  
Audit Firm ◽  
Going Concern ◽  
Discretionary Accrual ◽  
Audit Firms ◽  
Going Concern Opinion ◽  
Positive Effect

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

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

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.

Corporate Governance Factors and Auditor Going Concern Assessments

2005 ◽  
Vol 4 (3) ◽  
pp. 5-29 ◽  
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.

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

2011 ◽  
Vol 30 (2) ◽  
pp. 77-102 ◽  
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.

scholarly journals The Effect of Financial Distress, Firm Growth, and Previous Year’s Opinion on The Firm’s Going Concern Opinion

2021 ◽  
Vol 58 (1) ◽  
pp. 247-258
Author(s):  
Amiruddin, Grace T. Pontoh, Marina Lauren
Keyword(s):  
Financial Distress ◽  
Firm Growth ◽  
Stock Exchange ◽  
Secondary Data ◽  
Substantial Impact ◽  
Audit Opinion ◽  
Going Concern ◽  
Service Companies ◽  
Going Concern Opinion ◽  
The Impact

This research aims to examine and determine the impact of financial distress, firm growth, and opinion on previous year to firms‘going concern. The study was carried on service companies that are listed on Indonesia Stock Exchange during 2015-2017. A total of 210 samples were selected using the purposive sampling method. This research utilizes secondary data in the form of the firm’s financial statements and independent auditor’s reports. This research utilized logistic regression analysis to process the data. Results showed that financial distress and previous year’s opinion has significantly affect the firm’s going concern audit opinion while the firm growth has no substantial impact on the firm’s going concern audit opinion. Simultaneously, financial distress, firm growth, and previous year's opinion significantly affected the firm's going concern opinion.

scholarly journals The Effect of Financial Distress, Debt Default and Audit Tenure on Going Concern Opinion

2019 ◽  
Vol 8 (4) ◽  
pp. 1049-1054
Keyword(s):  
Financial Distress ◽  
Stock Exchange ◽  
Statistical Tests ◽  
Secondary Data ◽  
Manufacturing Companies ◽  
Audit Opinion ◽  
Going Concern ◽  
Debt Default ◽  
Going Concern Opinion ◽  
Negative Effect

One of the accounting assumptions is going concern. Going concern is how company can survive in long time business operation. Going concern becomes very crucial for users of financial statements, namely investors and creditors. If the company in which the investor invests funds and the creditors lend their funds is bankrupt, then the investment and credit lent are in vain and the investor and creditor suffer losses. This study aims to examine the effect of financial distress, debt default, and audit tenure on the acceptance of going concern audit opinion in the period 2014-2018. This study uses secondary data from manufacturing companies financial report which listed in Indonesian Stock Exchange, using purposive sampling method, we obtained 28 companies that are feasible, so that the sample from the study amounted to 140 samples. Statistical tests were performed using SPSS version 24.0 using logistic regression analysis. The results of this study show that financial distress variables have a significant negative effect while debt default and audit tenure have a positive effect on the acceptance of going-concern audit opinion.

scholarly journals Does Revenue-Expense Matching Relate To Going-Concern Audit Opinion Conditional On Firm’s Financial Distress?

2016 ◽  
Vol 32 (3) ◽  
pp. 947-966 ◽  
Author(s):  
Hak Woon Kim ◽  
Sooro Lee
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Financial Distress ◽  
Management Behavior ◽  
Audit Opinion ◽  
Going Concern ◽  
Conservative Accounting ◽  
Aggressive Accounting ◽  
And Behavior

This paper investigates how firms manage the revenue-expense relationship in the presence of a going-concern audit opinion (GCO). Using Korean data, we find that firms with GCOs both delay and accelerate recognition of current expenses for current revenues. We also find that firms in severe financial distress that receive GCOs exhibit conservative accounting, whereas GCO firms in relatively less financial trouble adopt aggressive accounting. Overall, our results imply that firms’ matching extent and behavior provide useful information regarding financial reporting and can explain the earnings management behavior of firms with GCOs.

scholarly journals A Review Of Going Concern Prediction Studies: 1976 To Present

2011 ◽  
Vol 5 (5) ◽  
Author(s):  
Jodi L. Bellovary ◽  
Don E. Giacomino ◽  
Michael D. Akers
Keyword(s):  
Model Development ◽  
Probit Analysis ◽  
Securities And Exchange Commission ◽  
Logit Analysis ◽  
Font Size ◽  
Primary Methods ◽  
Going Concern ◽  
Sarbanes Oxley ◽  
Public Company ◽  
Going Concern Opinion

<p class="MsoNormal" style="text-justify: inter-ideograph; text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt; mso-bidi-font-style: italic; mso-bidi-font-size: 12.0pt;"><span style="font-family: Times New Roman;">In 1962, the Securities and Exchange Commission (SEC) was the first to address going concern issues with Accounting Series Release (ASR) No. 90.&nbsp;&nbsp; Then, in 1963, the AICPA issued Statement on Auditing Procedures (SAP) No. 33, in response to ASR No. 90.&nbsp; Both ASR No. 90 and SAP No. 33 addressed qualifications for issues that were unresolved and the results of which were indeterminable at the statement date. Soon after the issuance of Statement on Auditing Standards (SAS) No. 2 in 1974, researchers began to conduct studies on going concern issues.&nbsp; This paper provides a comprehensive review of the literature on going concern studies and updates studies by Mutchler (1983) and Asare (1990) which provide detailed reviews of the evolution of the going concern report and requirements of the standards related to auditors' assessment of going concern.&nbsp; Since SAS No. 2, the profession has not provided additional guidance on going concern.&nbsp; Even the Sarbanes-Oxley Act of 2002 (SOX), makes no modifications to the requirements for considering going concern and the Public Company Accounting Oversight Board has not issued guidance addressing going concern. Starting with the first going concern prediction study [McKee, 1976], this paper identifies 27 models developed for predicting the going concern opinion and identifies the primary methods used for model development; multivariate discriminant analysis (MDA), logit analysis, probit analysis, and neural networks are.&nbsp; This paper also identifies; the most popular type of focused model and identifies three non-U.S. firm models, the number of factors considered in any one study,&nbsp; and the predictive abilities of the models. The paper also provides an annotated bibliography for the 27 models.</span></span></p>

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

2017 ◽  
Vol 14 (2) ◽  
pp. 17-28 ◽  
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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