Business Strategy and Auditor Reporting

Yu Chen; John Daniel Eshleman; Jared S. Soileau

doi:10.2308/ajpt-51574

Business Strategy and Auditor Reporting

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-51574 ◽

2016 ◽

Vol 36 (2) ◽

pp. 63-86 ◽

Cited By ~ 21

Author(s):

Yu Chen ◽

John Daniel Eshleman ◽

Jared S. Soileau

Keyword(s):

Business Strategy ◽

Data Availability ◽

Material Weakness ◽

Going Concern ◽

Going Concern Opinion ◽

Auditor Reporting ◽

The Cost ◽

Type Ii Errors ◽

To Receive ◽

Organizational Literature

SUMMARY This study examines whether a firm's business strategy influences auditor reporting. We rely on the organizational literature to develop our prediction that firms utilizing the innovative “prospector” strategy will be more likely than firms utilizing the cost-leadership “defender” strategy to receive both going concern and material weakness opinions. Our empirical evidence supports this prediction. Specifically, we find that, among a sample of financially troubled firms, prospectors are significantly more likely than defenders to receive a going concern opinion. We then analyze a sample of clients who subsequently filed for bankruptcy and find that auditors are less likely to issue going concern opinions to prospector clients. This indicates that auditors commit more Type II errors when auditing prospector clients. We also find that prospectors are significantly more likely than defenders to receive a material weakness opinion. Taken together, the evidence suggests that business strategy is a significant determinant of both going concern and material weakness auditor reporting. JEL Classifications: M41; M42; L10. Data Availability: All data are available from public sources identified in the text.

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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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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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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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Going Concern Opinion and Cost of Equity

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-50827 ◽

2014 ◽

Vol 33 (4) ◽

pp. 1-39 ◽

Cited By ~ 16

Author(s):

Keval Amin ◽

Jagan Krishnan ◽

Joon Sun Yang

Keyword(s):

Positive Association ◽

Equity Capital ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

Significant Positive Association ◽

Audit Opinion ◽

Going Concern ◽

Going Concern Opinion ◽

Distressed Firms ◽

The Cost

SUMMARY: Prior studies document a negative market reaction to going concern opinions. We extend this literature by focusing on the link between the going concern opinion and the cost of equity capital. Using two different samples (one comprising distressed firms and the other matched on propensity score), we document a significant positive association between the issuance of the going concern opinion and the firm's subsequent cost of equity capital. This result is robust to sensitivity tests using various subsamples, time periods, and multiple methods for computing the cost of equity capital. We also examine the association between changes in the audit opinion (going concern to clean opinion and vice versa) and subsequent changes in cost of equity. We find that the cost of equity increases between 3.3 percent and 5.7 percent for firms that receive a first-time going concern opinion. This evidence illuminates the relevance of going concern opinions and the value of the information embedded in them.

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Information Transfer of Bankruptcy Announcements: Examining the Impact of Auditor Opinions

Accounting Horizons ◽

10.2308/acch-52572 ◽

2019 ◽

Vol 34 (1) ◽

pp. 45-66

Author(s):

Jeffrey R. Casterella ◽

Rosemond Desir ◽

Matthew A. Stallings ◽

James S. Wainberg

Keyword(s):

Capital Market ◽

Stock Price ◽

Information Transfer ◽

Data Availability ◽

Going Concern ◽

Market Participants ◽

Audit Firms ◽

Peer Firms ◽

Going Concern Opinion ◽

The Impact

SYNOPSIS Auditing standards require auditors to consider whether there is “substantial doubt” that their client will remain a going concern and to, accordingly, modify the audit report (PCAOB AS 2415). Prior research reports larger negative excess returns for bankrupt firms when bankruptcies occur without a prior going concern opinion. We investigate whether such audit opinions can also have an impact on industry peer firms. We find that peer firms experience significantly larger negative stock price drops when rivals' bankruptcies are not preceded by a going concern opinion. In addition, we find evidence of incremental stock price declines for peer firms when Big N audit firms fail to issue a going concern opinion. These findings should be of significant interest to regulators, auditors, and capital market participants as they serve to enhance our current understanding of the importance of going concern opinions for the share pricing of industry peer firms. JEL Classifications: G14; G33; M4; M42. Data Availability: All data are from public sources identified in the manuscript.

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Managerial Ability and the Accuracy of the Going Concern Opinion

Accounting and the Public Interest ◽

10.2308/apin-52125 ◽

2018 ◽

Vol 18 (1) ◽

pp. 29-52 ◽

Cited By ~ 3

Author(s):

Nathan R. Berglund ◽

Donald R. Herrmann ◽

Bradley P. Lawson

Keyword(s):

Type I ◽

Type Ii ◽

Managerial Ability ◽

Type I Errors ◽

Bankruptcy Risk ◽

Going Concern ◽

Information Signal ◽

Going Concern Opinion ◽

Prior Literature ◽

Type Ii Errors

ABSTRACT Current audit guidance directs the auditor to modify their opinion in the presence of significant doubt about their client's ability to continue as a going concern. This paper examines whether managerial ability influences the accuracy of auditors' going concern information signal. Following prior literature, we assess accuracy based on the subsequent viability of the client. We find that, while managerial ability decreases the risk of Type I errors (the auditor issues a going concern opinion for a firm that subsequently remains viable), managerial ability increases the risk of Type II errors (the auditor issues a standard unqualified report for a firm that subsequently files for bankruptcy). Considering prior research indicates that the auditor's opinion provides important information to the market, this finding has important public interest implications regarding the signaling of bankruptcy risk to investors and creditors by auditors' going concern opinion.

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Turnaround Initiatives and Auditors' Going-Concern Judgment: Memory for Audit Evidence

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-10346 ◽

2013 ◽

Vol 32 (3) ◽

pp. 105-121 ◽

Cited By ~ 4

Author(s):

Liesbeth Bruynseels ◽

W. Robert Knechel ◽

Marleen Willekens

Keyword(s):

Direct Effect ◽

Mediation Analysis ◽

Data Availability ◽

Direct Link ◽

Going Concern ◽

Cost Cutting ◽

Strategic Initiatives ◽

Audit Evidence ◽

Going Concern Opinion ◽

Distressed Firms

SUMMARY: This study uses an experiment to investigate how management turnaround initiatives influence auditors' going-concern decisions for financially distressed firms. Using mediation analysis, we are able to distinguish between a direct effect of strategic and operating turnaround initiatives on going-concern judgment and a mediated effect through auditors' evaluation of subsequent financial evidence. Results from the experiment indicate that operating turnaround initiatives (e.g., cost cutting) are associated with lower relative recall of positive financial evidence and a higher likelihood of receiving a going-concern opinion. Further, we find no evidence of a direct link between client operating or strategic initiatives and an auditor's going-concern judgment. Data Availability: Data are available from the authors upon request.

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KONSEKUENSI PENERIMAAN OPINI GOING CONCERN DAN KUALITAS AUDITOR TERHADAP COST OF DEBT

JURNAL AKUNTANSI EKONOMI dan MANAJEMEN BISNIS ◽

10.30871/jaemb.v5i1.450 ◽

2017 ◽

Vol 5 (1) ◽

pp. 45

Author(s):

Evi Grediani ◽

Nanik Niandari

Keyword(s):

Regression Analysis ◽

Cost Of Debt ◽

Going Concern ◽

Dummy Variable ◽

Total Debt ◽

Big 4 ◽

Auditor Quality ◽

Going Concern Opinion ◽

The Cost ◽

Interest Expense

This paper described empirical research examining the effect of auditor going concern opinion and auditor quality on cost of debt. Auditor going concern opinion is measured by dummy variable, which value of 1 if the opinion is going concern, and 0 otherwise. Auditor quality is also measured by dummy variable, which value 1 if the opinion given by Big-4 auditor, and 0 otherwise. Cost of debt is measured by interest expense divided by total debt. Using multiple regression analysis and a sample of 244 manufacturing company periods 2011 – 2014, the research find that auditor quality negatively effect the cost of debt and auditor going concern opinion doesn’t effect cost of debt.

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The Association Of Changes In Self-Regulated (Voluntary) Disclosures Of Business Strategy And The Going Concern Opinion

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v1i6.3026 ◽

2011 ◽

Vol 1 (6) ◽

Cited By ~ 1

Author(s):

Peter M. Theuri

Keyword(s):

Firm Performance ◽

Business Strategy ◽

Business Strategies ◽

Font Size ◽

Voluntary Disclosures ◽

Audit Opinion ◽

Going Concern ◽

Going Concern Opinion ◽

First Time ◽

Future Business

While a majority of research has pointed to management’s engagement in earnings management through accruals and choices in accounting methods, only recently have studies investigated similar practices through voluntary disclosures of firm performance and/or future business strategies disclosed by management as part of their annual reporting.  Since a firm’s future survival comes into question when a firm receives a going concern audit opinion, the key question is whether the presence of such an opinion can be associated with changes in self-regulated disclosures of business strategy.  Considering such bad news in light of management’s freedom to discuss their views of firm performance voluntarily offers a great opportunity for disclosure management.   This study investigates the association between changes in self-regulated (voluntary) disclosures of firm performance through articulation of future business strategy and the presence of a going concern audit opinion.  An experimental sample of 55 firms receiving a first-time going concern opinion is compared to a sample of 55 control firms not receiving a going concern opinion.  Data for a period of four years after the first-time going concern opinion is received is analyzed to provide 220 firm years for each sample of the 55 firms.  A score representing self-regulated disclosures of business strategy (dependent variable) derived from content analysis performed on sections of the annual report is used. Results indicate that management begins to disclose more defender type of business strategies about two years prior to the year of the first-time going concern opinion.  It may be an indicator that auditors begin expressing concerns about the firm’s ability to survive as far back as two years prior to their issuance of the first-time going concern opinion.  Overall results indicate a negative association between management’s tendency to disclose prospector type strategies and the first-time receipt of a going concern opinion.

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The Relationship between Audit Team Composition, Audit Fees, and Quality

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-51682 ◽

2017 ◽

Vol 36 (3) ◽

pp. 115-135 ◽

Cited By ~ 12

Author(s):

Sarowar Hossain ◽

Kenichi Yazawa ◽

Gary S. Monroe

Keyword(s):

Audit Quality ◽

Positive Association ◽

Audit Fees ◽

Professional Staff ◽

Data Availability ◽

Team Composition ◽

Going Concern ◽

Going Concern Opinion ◽

Audit Team ◽

First Time

SUMMARY Using Japanese data, we investigate whether there is a positive association between audit team composition based on the number of senior auditors, assistant auditors, and other professional staff on the audit team and audit fees and a variety of commonly used measures of audit quality (likelihood of issuing a going concern opinion and a first-time going concern opinion for a sample of financially distressed companies, the absolute value of discretionary and working capital accruals). We find that the number of senior auditors, assistant auditors, and other professional staff on the audit team are positively associated with audit fees. We find that the number of senior auditors on the audit team has a positive association with audit quality. However, the number of assistant auditors and other professional staff on the audit team are not significantly associated with any of our audit quality measures. JEL Classifications: M41; M42. Data Availability: All data are publicly available from the sources indicated in the paper.

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