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1 – 10 of over 166000Neoclassic economics is a thing of considerable beauty. It yet finds an increasing tendency on the part of those trained in its discipline to rebel from its neatly fitted…
Abstract
Neoclassic economics is a thing of considerable beauty. It yet finds an increasing tendency on the part of those trained in its discipline to rebel from its neatly fitted abstractions and intriguing diagrams. The rebellion stems from two sources. Veblen's sweeping attacks upon its postulates16 shock its theoretical foundations. The rapid changes in the industrial and business world discredited it on another front by bringing into increasingly sharp relief the divergence between the institutional assumptions of the orthodox theory and the conditions actually obtaining. The giant corporation, overhead costs, and the necessity for maintenance of volume, industrial concentration, the trade association, a widening spread among income classes, advertising, the growing inability of the consumer to gauge quality, the resort to reorganization instead of the “going out of business” of the long-run analyses – what place could the orthodox theory give to these important characteristics of the existing business economy?
The purpose of this paper is to conduct an experiment to examine whether investors view the going‐concern opinion as providing information that is useful in valuing companies'…
Abstract
Purpose
The purpose of this paper is to conduct an experiment to examine whether investors view the going‐concern opinion as providing information that is useful in valuing companies' stocks. Prior research on this issue using archival data has produced mixed results.
Design/methodology/approach
An experiment is conducted with financial analysts in which the auditor's opinion and the opinion of industry specialists (proxy for market expectations) are manipulated. Participants estimated the stock price of a fictional company both before and after the issuance of an auditor's opinion.
Findings
The results strongly support the hypothesis that investors perceive the going‐concern opinion as relevant for valuing a company's common stock. Furthermore, the participants viewed the going‐concern opinion as relevant even when the report confirmed prior market expectations.
Practical implications
Using a controlled setting, the paper finds that investors believe that the auditor's going‐concern opinion contains useful information. This suggests that auditors' judgment regarding client viability is valued by investors. Auditing standards that require an assessment of client viability should remain in place.
Originality/value
This is the first study that uses an experimental approach to examine whether investors view the auditor's going‐concern opinion as relevant to pricing stocks. The use of an experiment is intended to overcome methodological limitations inherent in studies that use archival data.
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Hian Chye Koh and Chan Kee Low
Going concern is a fundamental concept in accounting and auditing and the assessment of a firm's going concern status is not an easy task. Several going concern prediction models…
Abstract
Going concern is a fundamental concept in accounting and auditing and the assessment of a firm's going concern status is not an easy task. Several going concern prediction models based on statistical methods to assist auditors have been suggested in the literature. This study explores and compares the usefulness of neural networks, decision trees and logistic regression in predicting a firm's going concern status. The sample data comprise financial ratios for 165 going concerns and 165 matched non‐going concerns. The classification results indicate the potential usefulness of data mining techniques in a going concern prediction context. Further, the decision tree going concern prediction model outperforms the logistic regression and neural network models. Data mining techniques such as neural networks and decision trees are powerful for analysing complex non‐linear and interaction relationships, and hence can supplement and complement traditional statistical methods in constructing going concern prediction models.
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Nirosh Kuruppu, Fawzi Laswad and Peter Oyelere
The purpose of this paper is to ascertain the practical efficacy of statistical corporate failure models in improving auditors' going concern assessment. It also aims to examine…
Abstract
Purpose
The purpose of this paper is to ascertain the practical efficacy of statistical corporate failure models in improving auditors' going concern assessment. It also aims to examine auditors' perceptions of corporate failure models as an analytical procedure in this context.
Design/methodology/approach
The paper utilises a survey questionnaire with a case study component to evaluate the practical value of corporate failure models for assessing going concern, and to examine auditors' perceptions of such models as an analytical procedure for assessing going concern.
Findings
The results indicate that corporate failure models facilitate the formation of more appropriate going concern opinions and increase judgment consensus. Auditors perceive such models as useful in obtaining relevant evidential matter and in mitigating some of the subjectivity involved in assessing going concern. However, the results also indicate that corporate failure models are perceived to be more effective in the planning stages than at the final stages of the audit. Furthermore, auditors are seeking more explicit guidance in auditing standards on the use of corporate failure models for assessing going concern.
Originality/value
The study extends previous research by examining the practical efficacy of corporate failure models for assisting auditors to assess going concern in light of human information processing limitations. Further, it examines auditors' perceptions of corporate failure models as an analytical procedure, and the guidance that auditors seek on the use of such models in auditing standards.
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Brett S. Kawada and Jeff Jundong Wang
This study aims to examine a firm’s disclosure properties subsequent to receiving a going-concern opinion.
Abstract
Purpose
This study aims to examine a firm’s disclosure properties subsequent to receiving a going-concern opinion.
Design/methodology/approach
A difference-in-difference research design was used to control for endogeneity issues. Annual report readability is used as a proxy for firm disclosure.
Findings
The results indicate a negative and significant association between issuance of a going-concern report to a firm and the firm’s readability index in the subsequent year. In other words, after receiving a going-concern opinion, a firm’s annual report exhibits increased readability. The results, when broken into subsamples of surviving and failing firms, are concentrated in the surviving firms.
Research limitations/implications
Prior research has shown that firms change their disclosure properties due to endogenous choices motivated by incentive or exogenous shocks. The results of this study, however, suggest that firms that receive going-concern opinions are incentivized to be more forthcoming in disclosing their financial information.
Originality/value
To the authors’ knowledge, this study is the first to investigate how firms’ general disclosures change subsequent to receiving a going-concern opinion.
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Michael J. Meyer, John T. Rigsby and Jeff Boone
To examine whether auditor‐client relationships have an effect on the decision by an auditor to remove an audit qualification.
Abstract
Purpose
To examine whether auditor‐client relationships have an effect on the decision by an auditor to remove an audit qualification.
Design/methodology/approach
The paper tracks the event history of a sample of firms from the issuance of a first time audit qualification for going concern and non‐going concern contingencies (initial qualification issued between 1983 and 1987, all pre Statement of Auditing Standard (SAS) 58) to the issuance of a clean opinion (up through 1995 when SAS 79 was issued). Attachment theory provides a theoretical framework for the variables analyzed and discrete time survival analysis is used as the statistical method in the analysis so as to evaluate each company year from the initial unclean opinion to the year a clean opinion is issued.
Findings
It is found that interpersonal and interorganizational attachment has a significant impact on those opinion decisions that require more auditor judgment (i.e. going concern).
Originality/value
This study examines the linkage between auditor tenure and audit quality in a broader context than has been examined to date. Using attachment theory for the foundation, auditor tenure can be viewed as but one measure of the attachment between auditors and clients. In this study, a number of measures of both interpersonal and interorganizational attachment between auditors and clients are included. Further, auditor opinion judgments are examined as a determinant of auditor quality. Finally, discrete‐time survival analysis is employed which allows the tracking of the entire event history from initial qualification to removal of the qualification, something not possible with most standard statistical techniques.
Nirosh Kuruppu, Fawzi Laswad and Peter Oyelere
Recent research questions whether bankruptcy is the best proxy for assessing going concern since filing for bankruptcy is not synonymous with the invalidity of the going concern…
Abstract
Recent research questions whether bankruptcy is the best proxy for assessing going concern since filing for bankruptcy is not synonymous with the invalidity of the going concern assumption. Furthermore, in contrast to debtor‐oriented countries such as the USA, liquidation is the most likely outcome of corporate insolvency in creditor‐oriented countries such as the UK, Germany, Australia and New Zealand. This suggests that bankruptcy prediction models have limited use for assessing going concern in creditor‐oriented countries. This study examines the efficacy of a corporate liquidation model and a benchmark bankruptcy prediction model for assessing company liquidation. It finds that the former is more accurate in predicting company liquidations in comparison with the latter. Most importantly, Type 1 errors for the liquidation prediction model are significantly lower than for the bankruptcy prediction model, which indicates its greater efficacy as an analytical tool for assessing going concern. The results also suggest that bankruptcy prediction models might not be appropriate for assessing going concern in countries where the insolvency code is creditor‐oriented.
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Antony Young and Yi Wang
The literature has revealed auditors' going concern risk disclosures are examined in research as a homogenous risk class. This is despite the various going concern modifications…
Abstract
Purpose
The literature has revealed auditors' going concern risk disclosures are examined in research as a homogenous risk class. This is despite the various going concern modifications auditors are entitled to give pertaining to this issue. A five‐level risk class is established in this paper derived from Australian Auditing Standard pronouncements to examine the appropriateness of auditors' going concern reporting relating specifically to the likelihood of firm failure.
Design/methodology/approach
Time is necessary to reveal the appropriateness of going concern reporting therefore a longitudinal research methodology was adopted. The research focuses on all Australian listed companies within the building industry in 1989 and follows all of the reporting of going concern by auditors and directors through until 2007. The building industry was selected because of its volatility, which increased the possibility of going concern reporting allowing a more in‐depth focus in the research. All auditors' going concern modifications were examined along with all indications of going concern problems identified by directors. To properly investigate the appropriateness of auditors' reporting, all sampled audit reports were examined using Altman's Z‐score model which were matched with a risk class model using the relevant requirements to report in order to determine the appropriateness of the auditors' and directors' opinions.
Findings
The level of under reporting of going concern risk by auditors (75 per cent) implies they are more affected by the agency relationship found in literature than directors who are found to have an incidence of underreporting of 57 per cent.
Research limitations/implications
Literature classifies auditors along with directors as part of the agency problem. Altman's Z‐score bankruptcy prediction model is used because of its enduring nature, reliability and ability to be externally calculated to independently compare the going concern reporting performance of auditors and directors as part of the contribution to this research area.
Originality/value
The paper for the first time examines going concern reporting at a multi‐risk level rather than the binomial level used in research previously. The approach is developed in this paper using auditing pronouncements. These risk levels are linked with an independent measure being the Altman Z‐score to determine the appropriateness of auditors' and directors' reporting of going concern issues.
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This and the following article are published at the suggestion of the Institute of Chartered Accountants in Scotland in the hope that they will stimulate greater interest on the…
Abstract
This and the following article are published at the suggestion of the Institute of Chartered Accountants in Scotland in the hope that they will stimulate greater interest on the part of practitioners in the going concern valuation problem. Both articles reflect the deliberations and experience of the members of the Valuation Group of the Union Européenne des Experts Comptables Economiques et Financiers (UEC).
Walter Masocha and Pauline Weetman
This paper seeks to explore in depth the ways in which the rhetoric of the standard setter responds to comments received during development of a standard.
Abstract
Purpose
This paper seeks to explore in depth the ways in which the rhetoric of the standard setter responds to comments received during development of a standard.
Design/methodology/approach
Previous research has explored the use of rhetorical strategies in accounting standards to construct and persuade as to what is “good” and to silence potential criticisms and alternative proposals. The exploration is extended to the development of an auditing standard and is strengthened by relating the opinions of lobbyists to the rhetoric used in the response.
Findings
The analysis shows that, in a situation where the standard setter's position changed significantly during the exposure of proposals to comment, rhetorical strategies in the exposure draft or standard were adapted to match the changing direction of persuasion, with silencing of potential counter‐argument evidenced in the surrounding explanatory material.
Research implications/limitations
The research demonstrates that those using standards should be aware of the normative nature of these documents and the subjectivity inherent in the nature of the text.
Originality/value
The paper builds on Young's 2003 paper by exploring the dynamics of the ways in which the rhetoric of the standard setter responds to comment during the consultation process.
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