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

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.

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OPINION ANALYSIS GOING CONCERN THROUGH AUDITOR QUALITY AND AUDITOR EXPERIENCE

Jurnal Ilmiah Bisnis dan Ekonomi Asia ◽

10.32812/jibeka.v12i1.17 ◽

2018 ◽

Vol 12 (1) ◽

pp. 65-73

Author(s):

Retno Wulandari ◽

Ida Nuryana

Keyword(s):

Audit Quality ◽

Test Reliability ◽

Test Results ◽

Accounting Firm ◽

The Public ◽

Going Concern ◽

Auditor Quality ◽

Going Concern Opinion ◽

Measuring Tool

The research was conducted in Malang City area with auditor as the population while the sample with pursposive sampling while the data analysis used is variable test with linkert scale and using SPPS statitisk test. In this study conducted at the Public Accounting Firm in Malang, showed that by using validity test, reliability, assumption Heterokedastisitas, multicolinierity assumption test, hypothesis testing simultaneously and partial and autocorrelation test showed that the questionnaire used by the researchers is feasible as a measuring tool for analysis in this study and provide consistent results. In the test results Hypothesis gives results that reject Ho and accept the hypothesis of research Ha, so that the auditor experience and audit quality together provide a significant effect on going concern opinion. Partial experience does not affect the giving of going concern opinion while the quality of audit partially affect the giving of going concern opinion.

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Auditor Fees and Going-Concern Reporting Decisions on Bankrupt Companies: Additional Evidence

Current Issues in Auditing ◽

10.2308/ciia-51109 ◽

2015 ◽

Vol 9 (1) ◽

pp. A13-A27 ◽

Cited By ~ 2

Author(s):

William J. Read

Keyword(s):

Audit Fees ◽

Auditor Independence ◽

Data Availability ◽

Audit Failure ◽

The Public ◽

Going Concern ◽

Audit Firms ◽

Public Company ◽

Reporting Decisions ◽

Auditor Fees

SUMMARY The recent growth in non-audit services (NAS) at the major audit firms has the attention of auditing regulators. On several occasions recently, board members of the Public Company Accounting Oversight Board (PCAOB) have indicated that the rise in NAS may place auditor independence at risk (Harris 2014; Tysiac 2014). Impaired independence can result in audit failure, which includes situations when auditors fail to issue going-concern (GC) audit opinions to soon-to-be bankrupt companies. In this paper, I examine the association between the propensity of auditors to issue GC opinions and NAS fees (and audit fees) to 203 bankrupt companies during 2002–2013. In analysis, I find no significant relation between GC decisions and NAS fees and audit fees. My results may interest U.S. regulators, who recently expressed concerns about the threat to auditor independence from the spike in NAS at the major firms. Data Availability: Publicly available from sources identified in the paper.

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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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Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the PCAOB Rulemaking Docket Matter No. 31: PCAOB Release No. 2010-005, Application of the “Failure to Supervise” Provision of the Sarbanes-Oxley Act of 2002 and Solicitation of Comment on Rulemaking Concepts

Current Issues in Auditing ◽

10.2308/ciia-50011 ◽

2011 ◽

Vol 5 (1) ◽

pp. C11-C15 ◽

Cited By ~ 2

Author(s):

Joseph Brazel ◽

James Bierstaker ◽

Paul Caster ◽

Brad Reed

Keyword(s):

Audit Quality ◽

Exposure Period ◽

Public Accounting ◽

Accounting Firms ◽

Accounting Firm ◽

The Public ◽

Sarbanes Oxley ◽

Public Company ◽

Auditing Standards ◽

Supervision Practices

SUMMARY: Recently, the Public Company Accounting Oversight Board (“PCAOB” or “Board”) issued a release to address, in two ways, issues relating to the responsibilities of a registered public accounting firm and its supervisory personnel with respect to supervision. First, the release reminds registered firms and associated persons of, and highlights the scope of, Section 105(c)(6) of the Sarbanes-Oxley Act of 2002 (“the Act”), which authorizes the Board to impose sanctions on registered public accounting firms and their supervisory personnel for failing to supervise reasonably an associated person who has violated certain laws, rules, or standards. Second, the release discusses and seeks comment on conceptual approaches to rulemaking that might complement the application of Section 105(c)(6) and, through increased accountability, lead to improved supervision practices and, consequently, improved audit quality. The PCAOB provided for a 91-day exposure period (from August 5, 2010, to November 3, 2010) for interested parties to examine and provide comments on the conceptual approaches to rulemaking that might complement the application of Section 105(c)(6). The Auditing Standards Committee of the Auditing Section of the American Accounting Association provided the comments in the letter below to the PCAOB on the PCAOB Release No. 2010-005, Application of the “Failure to Supervise” Provision of the Sarbanes-Oxley Act of 2002 and Solicitation of Comment on Rulemaking Concepts.

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Does Auditor Tenure Reduce Audit Quality?

Gadjah Mada International Journal of Business ◽

10.22146/gamaijb.5478 ◽

2012 ◽

Vol 14 (3) ◽

pp. 303 ◽

Cited By ~ 1

Author(s):

Junaidi ◽

Setiyono Miharjo ◽

Bambang Hartadi

Keyword(s):

Audit Quality ◽

Stock Exchange ◽

Financial Statements ◽

Auditor Independence ◽

Going Concern ◽

Auditor Tenure ◽

Client Relationship ◽

Going Concern Opinion ◽

Research Analysis ◽

Public Accountant

Reduced auditor independence and the rise of corporate accounting manipulations have caused trust of the users in audited financial statements to begin to decline, so users of financial statements are questioning whether public accountants are independent parties. This research issue is related to the Decree of the Minister of Finance No. 17 in 2008 about public accountant services. Giving attestation services, in the form of financial statements about an entity, are conducted by the audit firm for no longer than 6 consecutive fiscal years and by a public accountant for 3 consecutive fiscal years at the longest. The purpose of this research is to examine empirically the influence of auditor tenure on audit quality. Auditor tenure is measured as the length of the auditor-client relationship. Audit quality is measured by the propensity of auditors to issue a going-concern opinion. This study uses a sample of firms listed on the Indonesia Stock Exchange during the 2003-2008 period. Research analysis uses logit model to measure the effect of auditor tenure on the auditors’ propensity to publish a going-concern opinion. The hypothesis which states that the length of auditor tenure influences negatively the propensity of auditors to issue a going-concern opinion is statistically supported. This research is expected to provide empirical evidence about the importance of limiting of the auditor-client relationship.

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A Review Of Going Concern Prediction Studies: 1976 To Present

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v5i5.2541 ◽

2011 ◽

Vol 5 (5) ◽

Cited By ~ 7

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

In 1962, the Securities and Exchange Commission (SEC) was the first to address going concern issues with Accounting Series Release (ASR) No. 90.   Then, in 1963, the AICPA issued Statement on Auditing Procedures (SAP) No. 33, in response to ASR No. 90.  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.  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.  Since SAS No. 2, the profession has not provided additional guidance on going concern.  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.  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,  and the predictive abilities of the models. The paper also provides an annotated bibliography for the 27 models.

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Auditor Fees and Auditor Independence—Evidence from Going Concern Reporting Decisions in Germany

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-50532 ◽

2013 ◽

Vol 32 (4) ◽

pp. 129-168 ◽

Cited By ~ 21

Author(s):

Nicole V. S. Ratzinger-Sakel

Keyword(s):

Audit Quality ◽

Audit Fees ◽

Auditor Independence ◽

Litigation Risk ◽

Manufacturing Companies ◽

Anglo Saxon ◽

Going Concern ◽

Big 4 ◽

Reporting Decisions ◽

Auditor Fees

SUMMARY This study examines the potential for non-audit services to impair auditor independence using going concern modifications as a proxy for audit quality. While prior research has focused primarily on Anglo-Saxon environments, this study focuses on Germany because of the country's unique reporting attributes and lower litigation risk when compared to Anglo-Saxon settings. Based on a sample of financially stressed manufacturing companies during the period 2005–2009, the results do not suggest that German auditors are less independent when the level of non-audit fees is high. However, there is some evidence that Big 4 audit firms are less likely than their non-Big 4 counterparts to issue a going concern emphasis-of-matter paragraph for engagements characterized by both relatively high levels of non-audit fees and financial stress.

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Auditing Issues with Chinese Reverse Merger Companies Traded in the United States

International Journal of Accounting and Financial Reporting ◽

10.5296/ijafr.v2i2.2187 ◽

2012 ◽

Vol 2 (2) ◽

pp. 76

Author(s):

Frederic M. Stiner ◽

Susan A. Lynn

Keyword(s):

United States ◽

Audit Quality ◽

The United States ◽

Auditor Independence ◽

Securities And Exchange Commission ◽

Future Research ◽

Chinese Government ◽

The Public ◽

Reverse Mergers ◽

Public Company

Recently there have been two issues related to Chinese companies seeking capital in the United States. The first issue is frauds that have been perpetrated by companies using reverse mergers in order to go public. The second issue is fraud in continuing audit engagements when there has been reliance by an American audit firm on a foreign accountant’s audit work. There is also conflict between the Public Company Accounting Oversight Board (PCAOB) demanding to inspect audit workpapers for companies in China and the Chinese government’s refusal to let the PCAOB see these workpapers. These issues relate to characteristics of the practice of accounting and auditing in China that threaten auditor independence and audit quality. The paper discusses: (1) issues involving reverse mergers and the response of the Securities and Exchange Commission (SEC) to these issues, (2) issues involving reliance on the work of foreign Certified Public Accountants (CPAs) and the response of the PCAOB to these issues, (3) issues involving conflicts between U.S. regulatory agencies and the Chinese government over access to audit-related documents, and (4) suggestions for future research.

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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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A Decade after Sarbanes-Oxley: The Need for Ongoing Vigilance, Monitoring, and Research

Accounting Horizons ◽

10.2308/acch-50868 ◽

2014 ◽

Vol 28 (4) ◽

pp. 917-930 ◽

Cited By ~ 12

Author(s):

Jeanette M. Franzel

Keyword(s):

Audit Quality ◽

Warning Signs ◽

Regulatory Regime ◽

Government Accountability ◽

Public Companies ◽

The Public ◽

Sarbanes Oxley ◽

Public Company ◽

The Impact ◽

Audit Independence

SYNOPSIS After more than a decade since passage of the Sarbanes-Oxley Act and the creation of the Public Company Accounting Oversight Board (PCAOB), it is appropriate and necessary to ask questions about the present state of audit quality and evaluate the impact and effectiveness of PCAOB's oversight programs. Written from the viewpoint of a current PCAOB Board member and former Managing Director of the U.S. Government Accountability Office (GAO), this paper discusses the warning signs of serious auditing problems in the years preceding the Act, and the role that the GAO played in analyzing those risks and calling for greater oversight of the accounting profession's auditing public companies. We must be vigilant and continually examine the activities of the auditing profession and the regulatory regime to ensure that audit independence and audit quality remain front and center to ensure investor protection and safeguard the public interest. Academic researchers play a key role in this system of vigilance. This paper provides views on many areas within the auditing profession that would benefit from further research and analysis, as well as opportunities for research that could be useful to the PCAOB as it considers current and future regulatory priorities.

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