Recent Changes in the Association between Bankruptcies and Prior Audit Opinions

2005 ◽  
Vol 24 (1) ◽  
pp. 21-35 ◽  
Author(s):  
Marshall A. Geiger ◽  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Paradigm Shift ◽  
Recovery Period ◽  
Client Characteristics ◽  
Going Concern ◽  
High Profile ◽  
Sarbanes Oxley ◽  
Reporting Decisions ◽  
Audit Opinions ◽  
Auditor Reporting ◽  
The U.S

The intense legislative and media scrutiny after a series of high-profile corporate failures, coupled with the paradigm shift in the regulation of the auditing profession brought forth by the Sarbanes-Oxley Act, suggests that auditors' decisions would be more conservative in the period after December 2001. Based on analyses of 226 financially stressed companies that entered bankruptcy during the period from 2000 to 2003, we find that auditors are more likely to issue going-concern modified audit opinions in the period after December 2001. Since the post-December 2001 period coincides with recovery from a recession in the U.S., we also examine prior audit opinions for 93 companies entering bankruptcy in 1991 and 1992. We find that auditors were also more likely to issue prior going-concern modified audit opinions in 2002–03 than in the earlier recession recovery period. Following the technique used in Francis and Krishnan (2002), we document that the increase in going-concern modification rates for bankrupt companies after December 2001 is due to changes in auditor reporting decisions and not solely due to differences in client characteristics between the time periods studied.

Audit Fees, Nonaudit Fees, and Auditor Reporting on Stressed Companies

2003 ◽  
Vol 22 (2) ◽  
pp. 53-69 ◽  
Author(s):  
Marshall A. Geiger ◽  
Dasaratha V. Rama
Keyword(s):  
Audit Committee ◽  
Positive Association ◽  
Audit Fees ◽  
Manufacturing Companies ◽  
Significant Positive Association ◽  
Going Concern ◽  
Reporting Decisions ◽  
Nonaudit Services ◽  
Audit Opinions ◽  
Auditor Reporting

The SEC and legislators have expressed concerns that independence may be negatively impacted if auditors perform significant nonaudit services for their audit clients, and that providing lucrative nonaudit services to clients may make it more likely that auditors will “see things the client's way.” Such concerns are particularly salient in the context of issues that involve significant auditor judgment, as in the case of reporting decisions related to going-concern uncertainties for financially stressed clients. In this study we examine the association between the magnitude of audit and nonaudit fees and auditor report modification decisions for financially stressed manufacturing companies. In our analysis we control for financial stress, company size, reporting lag, default status, audit committee effectiveness, and management plans. The results indicate a significant positive association between the magnitude of audit fees and the likelihood of receiving a going-concern modified audit opinion, but we find no significant association between nonaudit fees and audit opinions. Additional analyses also find no significant relationship between the ratio of nonaudit service fees to audit fees and reporting decisions, and indicate that our results are robust across alternative model, variable, and sample specifications. We also control for the potential endogeneity of audit opinions, audit fees, and nonaudit fees, and find the same positive association of audit fees with opinions, but no association between nonaudit fees and audit opinions. Overall, we find no evidence of a significant adverse effect of nonaudit fees on auditor reporting judgments for our sample of distressed companies.

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

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.

Auditor Conservatism after Enron

2010 ◽  
Vol 29 (1) ◽  
pp. 267-278 ◽  
Author(s):  
Dorothy A. Feldmann ◽  
William J. Read
Keyword(s):  
Financial Statement ◽  
Going Concern ◽  
Corporate Scandals ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
The Media ◽  
Time Periods ◽  
Audit Opinions ◽  
Auditor Conservatism

SUMMARY: Corporate scandals and the resulting passage of the Sarbanes-Oxley Act (SOX) in 2002 significantly affected the auditing profession. The quality of financial statement audits was called into questioned and the media and regulators held audit firms responsible. Several studies found evidence of an increase in the issuance of going-concern opinions after the passage of SOX relative to earlier time periods (Geiger et al. 2005; Nogler 2008; Myers et al. 2008). Auditors, it appears, behave more conservatively when the profession is in the headlines. We replicate and extend this research to determine whether the heightened conservatism continues or whether it fades as time passes. We examine audit opinions issued 12 months or less prior to a bankruptcy filing for 565 companies from 2000–2008. Our findings indicate that while the proportion of going-concern modifications increases sharply in 2002–2003 compared to 2000–2001, it declines in the periods that follow, ultimately returning to its pre-Enron level.

Investors’ Expectations of the Improvement in the Credibility of Audit Opinions following PCAOB Inspection Reports with Identified Deficiencies

2010 ◽  
Vol 10 (1) ◽  
pp. 36-56 ◽  
Author(s):  
Jesse C. Robertson ◽  
Richard W. Houston
Keyword(s):  
Public Confidence ◽  
Audit Opinion ◽  
Outreach Programs ◽  
High Profile ◽  
Perceived Credibility ◽  
Sarbanes Oxley ◽  
Accounting Scandals ◽  
Audit Firms ◽  
Public Company ◽  
Audit Opinions

ABSTRACT: Following high-profile accounting scandals (e.g., Enron), Congress passed the Sarbanes-Oxley Act, which established the Public Company Accounting Oversight Board (PCAOB). The PCAOB conducts regular inspections of audit firms and issues inspection reports that describe audit deficiencies identified during the inspections. One purpose of these reports is to improve public confidence in auditor credibility. We conduct a between-subjects experiment to provide initial evidence concerning investors’ perceptions of audit opinion credibility following PCAOB inspections. While we find an overall increase in perceptions of the credibility of future audit opinions, the degree to which perceptions increase is a function of three salient characteristics of PCAOB reports. Specifically, we find that investors anticipate more (less) improvement in the credibility of future opinions when: (1) inspections contain high (low) severity deficiencies; (2) firms respond to the reports with concessions (denials); and (3) for small (large) firms. Further, investors’ assessment of the credibility of the firm’s response to the PCAOB report is higher for concessions than denials; response credibility fully mediates the effect of response type (concession or denial) on the perceived improvement in the credibility of future opinions. Therefore, the inspections may be a useful tool for improving the perceived credibility of audit opinions under certain conditions. Implications include the possibility that firms should consider carefully the nature of their responses and the PCAOB should consider establishing outreach programs to investors to educate them about its regulatory role.

Reexamining the influence of large clients on office-level auditor reporting decisions

2016 ◽  
Vol 31 (1) ◽  
pp. 4-16
Author(s):  
Lucy Lim
Keyword(s):  
Big Five ◽  
Logistic Model ◽  
Design Methodology ◽  
Audit Fees ◽  
Content Type ◽  
Going Concern ◽  
Discretionary Accrual ◽  
Reporting Decisions ◽  
Auditor Reporting ◽  
Office Level

Purpose – This paper revisits the Reynolds and Francis’ (2001) study via the use of a more current dataset, incorporation of improvements into the accrual model and the use of actual fee data vs estimates. Using the improved analyses, the purpose of this paper is to examine whether more conservative auditors’ reports on larger clients are still evident. Design/methodology/approach – The paper follows Reynolds and Francis (2001) in using a regression model with White-adjusted t-statistics for the discretionary accrual model and a logistic model for going concern analysis. The most current discretionary accrual model is used to improve the original model, use actual fee data (not available previously), and add analyses using the two components of total fees (i.e. audit and non-audit fees). Findings – As opposed to Reynolds and Francis (2001), the results show that the Big Five auditors are less conservative with higher-paying clients as they allow their clients to have more discretionary accruals. While Reynolds and Francis (2001) found that auditors are more likely to report going concern opinions for higher-paying clients, the results in this paper does not show any difference in the propensity of auditors to issue going concern opinions. Originality/value – This study replicates Reynolds and Francis (2001) using more recent US data, applying the most recent discretionary accrual model, using the actual fee data, and adding analyses using total fees decomposition.

Auditor Independence and Auditor-Provided Tax Service: Evidence from Going-Concern Audit Opinions Prior to Bankruptcy Filings

2008 ◽  
Vol 27 (2) ◽  
pp. 31-54 ◽  
Author(s):  
Dahlia Robinson
Keyword(s):  
Audit Quality ◽  
Auditor Independence ◽  
The Public ◽  
Going Concern ◽  
Sarbanes Oxley ◽  
Public Company ◽  
Reporting Decisions ◽  
Going Concern Opinion ◽  
Information Spillover

SUMMARY: This study examines whether auditors’ provision of tax services impairs auditor independence by focusing on auditors’ going-concern opinions among a sample of bankruptcy filing firms. The evidence from the bankruptcy setting is particularly salient given that the bankruptcy of corporations such as Enron motivated several provisions of the Sarbanes-Oxley Act (SOX) of 2002. More recently, auditors’ provision of tax service to their audit clients has been the focus of new rules by the Public Company Accounting Oversight Board (PCAOB). Consistent with improved audit quality from information spillover, the study documents a significant positive correlation between the level of tax services fees and the likelihood of correctly issuing a going-concern opinion prior to the bankruptcy filing. One implication of this result is that restricting tax services by auditors of poorly performing firms may diminish the quality of auditors’ reporting decisions without leading to an improvement in auditor independence.

scholarly journals The auditor’s opinion modifications around domestic and global financial crises

2018 ◽  
Vol 26 (4) ◽  
pp. 622-639 ◽  
Author(s):  
Banu Sultanoglu ◽  
Can Simga Mugan ◽  
Umut Sekerdag ◽  
Adil Oran
Keyword(s):  
Financial Distress ◽  
Global Financial Crisis ◽  
Client Characteristics ◽  
Content Type ◽  
Audit Opinion ◽  
Audit Firms ◽  
Audit Opinions ◽  
Auditor Reporting ◽  
The Global Financial Crisis ◽  
Practical Implications

Purpose The purpose of this study is to investigate the effect of company characteristics such as the level of financial distress, client size and type of auditor on the propensity to issue modified audit opinions and to assess comparative differences in audit opinions during two significant economic crises in Turkey. Design/methodology/approach Logistic regression model is used to test the incremental contribution of each company characteristic on issuing the type of audit opinion for crisis periods. Additionally, to understand the reasons for differences in audit opinions between two types of crisis periods, the authors adopt Francis and Krishnan’s (2002) approach in which an auditor’s propensity to issue modified opinion may be jointly based on changes in client characteristics and auditor reporting strategies in that period. Findings The results indicate that there is a positive relationship between financial distress and the likelihood of receiving modified opinions in both crisis periods. Additionally, client size affects audit opinions negatively in both periods significantly. Auditors show higher propensity to issue a modified opinion during the domestic than the global financial crisis period, which could be explained by the changes in client characteristics more than their reporting strategy. Practical implications This study provides supportive evidence that the company characteristics including the financial distress can be very useful predictors for the auditors’ decisions while issuing their opinions. Originality/value The findings of different auditor behaviors during crises periods and possible reasons are the main contributions of this study for international and domestic regulators, investors, audit firms, academics and standard setters in emerging economies.

Changes in Risk of Foreign Firms Listed in the U.S. Following Sarbanes-Oxley

2008 ◽  
Author(s):  
Aigbe Akhigbe ◽  
Anna D. Martin ◽  
Takeshi Nishikawa
Keyword(s):  
Foreign Firms ◽  
Sarbanes Oxley ◽  
Changes In Risk ◽  
The U.S
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