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

2011 ◽  
Vol 30 (1) ◽  
pp. 1-20 ◽  
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.

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 Prior Opinion and Potency of Financial Distress on Going Concern Audit Opinion

2019 ◽  
Vol 1 (3) ◽  
Author(s):  
Putu Yudha Asteria Putri ◽  
Putu Dian Pradnyanitasari ◽  
I Gusti Ayu Ratih Permata Dewi
Keyword(s):  
Financial Distress ◽  
Stock Exchange ◽  
Secondary Data ◽  
Sampling Technique ◽  
Total Sample ◽  
Manufacturing Industries ◽  
Audit Opinion ◽  
Going Concern ◽  
Going Concern Opinion ◽  
Prior Opinion

This study aims to obtain empirical evidence of the influence of prior opinion and the potential of financial distress on going concern opinion. Going concern opinion happened  because the indicated of the company is no longer able to live the life to work. The results of previous studies get inconsistent results in terms of the effect of potential financial distress on the going concern opinion. The other indicators that can influence the existence of a going concern opinion is prior opinions which are previous opinions by an auditor. This study uses secondary data in manufacturing industries that listed on the Indonesia Stock Exchange in the period 2012-2018 become the population in this study with a total sample of 77 samples selected by purposive sampling technique.

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

2011 ◽  
Vol 27 (6) ◽  
pp. 135
Author(s):  
Paul Wertheim ◽  
Michael Robinson
Keyword(s):  
Financial Distress ◽  
Future Research ◽  
Type Ii ◽  
Main Research ◽  
Going Concern ◽  
Sarbanes Oxley ◽  
Going Concern Opinion ◽  
Distressed Firms ◽  
The Relationship ◽  
Audit Effectiveness

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.

scholarly journals Turnaround Initiatives and Going Concern Opinion

2021 ◽  
Vol 1 (2) ◽  
pp. 142-157
Author(s):  
Chandra Prasadhita
Keyword(s):  
Financial Distress ◽  
Cost Reduction ◽  
Stock Exchange ◽  
Manufacturing Companies ◽  
Asset Sales ◽  
Debt Restructuring ◽  
Going Concern ◽  
Management Actions ◽  
Going Concern Opinion

The main purpose of this study is to examine the role of Statement on Auditing Standards (PSA) No. 30 which requires an independent auditor to evaluate management actions to overcome the financial distress of the company to reduce the possibility of going concern opinion acceptance. Implementation of turnaround initiatives consists of additional capital, borrowing and debt restructuring, asset sales and cost reduction activities. The population of this research is 454 manufacturing companies listed on Indonesia Stock Exchange during 2011-2013. This study finds that borrowing and debt restructuring are positive information which reduces the probability of receiving going concern opinions. Whereas, cost reduction is the negative information that increases the probability of receiving going concern opinion. That shows there is no significant effect of withdrawal of capital and asset sales activities on the probability of going concern opinion acceptance.

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 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.

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.

Client Engagement Risks and the Auditor Search Period

2011 ◽  
Vol 25 (4) ◽  
pp. 685-702 ◽  
Author(s):  
Samer K. Khalil ◽  
Jeffrey R. Cohen ◽  
Kenneth B. Schwartz
Keyword(s):  
Internal Control ◽  
Financial Distress ◽  
Business Risk ◽  
Audit Risk ◽  
Industry Specialization ◽  
Client Engagement ◽  
Or Management ◽  
Auditor Industry Specialization ◽  
Audit Firms ◽  
Internal Control Weaknesses

SYNOPSIS This paper investigates whether client engagement risks lengthen the client acceptance phase for audit firms and result in a longer auditor search period for their clients. Using a sample of auditor resignations over the period 2003–2008, we document that the auditor search period is longer for firms associated with client business risk (financial distress) and audit risk (internal control weaknesses or management integrity issues), while it is shorter for firms representing reduced auditor business risk (auditor industry specialization). These findings highlight the importance of client risk assessment and explain audit firms' response to perceived client risks.

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