Corporate Innovation and the Auditor's Assessment of Going Concern

2021 ◽  
Author(s):  
Feng Guo ◽  
Adi Masli ◽  
Yang Xu ◽  
Joseph H. Zhang
Keyword(s):  
Patent Citation ◽  
Firm Level ◽  
High Exposure ◽  
External Auditors ◽  
Going Concern ◽  
Innovation Activities ◽  
Corporate Innovation ◽  
Going Concern Opinion ◽  
Financially Distressed ◽  
Mitigating Factor

In this study, we examine whether external auditors assess corporate innovation activities when considering a financially distressed client's ability to continue as a going concern. Using patent count, patent market value, and patent citation to measure the firm-level innovation output, we document that higher quantity and quality of innovation activities are associated with a lower likelihood of going concern opinions. The association between innovation and going concern opinions is more pronounced for audit offices with high exposure to corporate innovation and clients operating in R&D-intensive industries. In additional analyses, we confirm that innovation is associated with future business value, as measured by future profitability and intellectual property licensing agreements. We conclude that corporate innovation represents a mitigating factor when auditors consider whether a going concern opinion is appropriate for a financially distressed client.

The Relation between Managerial Ability and Audit Fees and Going Concern Opinions

2014 ◽  
Vol 34 (3) ◽  
pp. 139-160 ◽  
Author(s):  
Gopal V. Krishnan ◽  
Changjiang Wang
Keyword(s):  
Empirical Evidence ◽  
Audit Fees ◽  
Managerial Ability ◽  
Firm Level ◽  
Going Concern ◽  
Going Concern Opinion ◽  
Corporate Resources ◽  
Ability Measure

SUMMARY While prior research has examined the relation between firm-level attributes and auditors' decisions, there is little empirical evidence on whether managerial attributes are informative to auditors. We examine the relation between managerial ability, i.e., ability in transforming corporate resources to revenues, and audit fees and a going concern opinion. We use the managerial ability measure recently developed by Demerjian, Lev, and McVay (2012). We find that incremental to firm-level attributes, both audit fees and the likelihood of issuing a going concern opinion are decreasing in managerial ability. Collectively, our findings support the notion that managerial ability is relevant to auditors' decisions.

The Going Concern Opinion: A Time for a Referendum?

2010 ◽  
Author(s):  
Igor Pustylnick ◽  
Vicki Anderson ◽  
John H. Nugent
Keyword(s):  
Going Concern ◽  
Going Concern Opinion

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.

Consequences of Going-Concern Opinion Inaccuracy at the Audit Office Level

2020 ◽  
Vol 39 (3) ◽  
pp. 185-208
Author(s):  
Qiao Xu ◽  
Rachana Kalelkar
Keyword(s):  
Market Share ◽  
Audit Quality ◽  
Type I ◽  
Type I Errors ◽  
Negatively Associated ◽  
Going Concern ◽  
Big 4 ◽  
Office Market ◽  
Going Concern Opinion ◽  
Office Level

SUMMARY This paper examines whether inaccurate going-concern opinions negatively affect the audit office's reputation. Assuming that clients perceive the incidence of going-concern opinion errors as a systematic audit quality concern within the entire audit office, we expect these inaccuracies to impact the audit office market share and dismissal rate. We find that going-concern opinion inaccuracy is negatively associated with the audit office market share and is positively associated with the audit office dismissal rate. Furthermore, we find that the decline in market share and the increase in dismissal rate are primarily associated with Type I errors. Additional analyses reveal that the negative consequence of going-concern opinion inaccuracy is lower for Big 4 audit offices. Finally, we find that the decrease in the audit office market share is explained by the distressed clients' reactions to Type I errors and audit offices' lack of ability to attract new clients.

The Consequences of Accounting Failure for Innovation: A Multi-Level Analysis

2020 ◽  
Vol 34 (2) ◽  
pp. 109-124
Author(s):  
Megan F. Hess ◽  
Andrew M. Hess
Keyword(s):  
Firm Level ◽  
Psychological Response ◽  
Top Executives ◽  
Innovation Activities ◽  
Threat Rigidity ◽  
Multi Level ◽  
Multiple Levels ◽  
Financial Misconduct ◽  
Public Disclosures ◽  
Level Analysis

SYNOPSIS In this study, we investigate the relation between accounting failure and innovation at multiple levels in an organization by developing and testing a model for how top executives and functional managers might change their risk preferences and their innovation investments in response to public disclosures of financial misconduct. At the firm level, we find that accounting failures reduce subsequent investments in R&D, as predicted by a threat rigidity (“play it safe”) psychological response among top executives. At the project level, accounting failures have the opposite effect, resulting in an increase in the number of exploratory projects, as predicted by a failure trap (“swing for the fences”) psychological response among functional managers. Unpacking this relation at multiple levels of analysis helps us to understand the complex ways in which financial misconduct shapes a firm's innovation activities and appreciate the far-reaching consequences of accounting failure.

The Effect of Going-Concern Opinion Reliability on Market Prices

2012 ◽  
Author(s):  
Jennifer Winchel ◽  
Scott D. Vandervelde ◽  
Brad Tuttle
Keyword(s):  
Market Prices ◽  
Going Concern ◽  
Going Concern Opinion

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.

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