Search results

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.

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.

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.

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.

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.

The purpose of this study is to provide insights into the perceptions and uses of qualified audit reports in financial statements of small- and medium-sized enterprises (SMEs). As there is a long-standing debate on the usefulness of auditor’s going-concern reports, this study aims to provide insights into the factors that affect how banks perceive and use going-concern reports.

Semi-structured interviews with bank officers were conducted.

The study findings demonstrated that bank officers considered that the going-concern report provided information, although they did not regard the information as being particularly useful. The main factors affecting the usefulness of information are use of other information sources and bank officers’ perceptions of auditing. Other factors are also presented and discussed in the current research paper.

Regulators have taken the action to improve the auditor’s reporting model, and the findings provided by this study are important because they provide a deeper understanding of the perceptions and uses of audit reports from smaller companies. The study also contributes knowledge about the role of audit reports in the context of SMEs finance.

This is one of the first studies to use a qualitative approach to examine factors that affect the use of going-concern reports.

The generally accepted method of presentation with respect to going-concern reporting in a global context is to modify the auditor’s report with an explanatory paragraph in addition to having a separate note to the financial statements. In Canada, however, the auditor’s report is clean, and the going concern uncertainty is restricted to the endnotes. This research, using Canadian students as subjects and conducted as a between-subjects experiment, examines unsophisticated investor’s behavior to the signal conveyed by different reporting formats by auditors (U.S. versus Canadian). The results indicate that the form of the auditor’s report does significantly influence subjects’ decisions to invest and their perception of risk.

This study aims to examine the impact of Financial Accounting Standard Board’s Accounting Standard Update (ASU) 2014–15 on auditors’ going concern reporting. ASU 2014–15 provides accounting guidance for managers related to going concern issues, but there is evidence that regulatory changes affect auditor behavior. The authors examine if auditors’ propensity to issue going concern opinions (GCOs) for non-bankrupt, financially distressed firms changes after ASU 2014–15 became effective, and if the proportion of client bankruptcies with prior GCOs changes after ASU 2014–15 became effective.

The authors examine audit reports for non-bankrupt, financially stressed firms three years before and after the effective date of ASU 2014–15 to see if the propensity to issue a GCO differs in the pre- vs post-period. The authors then examine bankrupt, financially stressed firms to determine if the proportion of bankruptcies preceded by a GCO differs in the pre- vs post-period.

The authors find a significant increase in GCO reporting for non-bankrupt, financially stressed firms in the post-ASU 2014–15 period, suggesting auditor conservatism increased. The propensity for auditors to issue a GCO to bankrupt firms also increased significantly in the post-ASU period, providing evidence that auditors became more accurate, as more bankruptcies were preceded by a GCO than in the pre-ASU period.

This study uses new legislation which creates an exogenous shock to going concern reporting. Models and techniques are combined from prior literature and extended to investigate auditors’ reporting behaviors using two important and distinct samples.

Accounting literature is replete with quantitative models that use financial ratios to identify the probability of a going concern qualification. These studies, however, ignore qualitative cues that auditors use to identify going concern problems and mitigating factors (sound financial plans etc.) that auditors take into account in their choice of report. Tests whether, in the presence of financial distress, non‐financial cues play an important role in auditors’ choice. Results indicate that non‐financial variables can be used to discriminate between the auditor’s decision to issue the going concern qualified versus the clean report. Helps company management understand how auditors evaluate their clients and the importance of the qualitative criteria used in their evaluation. Can be used to predict the most probable outcome prior to the external audit. Second, facilitates understanding of the non‐financial red flags that could trigger the going concern report. Third, can be used to analyze potential acquisition targets, and, if the acquisition target is still otherwise desirable, be used in pricing negotiations. Fourth, can be applied to aspects of the firm’s own division’s operations in order to enable the internal audit department to better allocate its own investigational and problem‐solving resources. Finally, the fact that qualitative factors have power in predicting the going concern modified report suggests that company decision makers can evaluate others even if the auditor for political or other reasons has chosen not to render a modified report.

This study aims to examine a firm’s disclosure properties subsequent to receiving a going-concern opinion.

A difference-in-difference research design was used to control for endogeneity issues. Annual report readability is used as a proxy for firm disclosure.

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.

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.

To the authors’ knowledge, this study is the first to investigate how firms’ general disclosures change subsequent to receiving a going-concern opinion.

This study aims to examine the effect of real activities manipulation (RAM) on auditors’ decision of issuing going concern (GC) opinions for distressed companies.

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.

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.

This study provides evidence that auditors make going concern reporting decisions in consideration of the client’s abnormal operating decisions and management’s opportunism.

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.

Prior literature provides clear evidence that the judgments of experts differ from those of non‐experts. For example, Smith and Kida concluded that the extent of common biases that they investigated often are reduced when experts perform job related tasks as compared to students. The aim in this theoretical study is to examine whether “heuristic biases significantly moderate the understanding of experts versus novices in the going concern judgment?”

The authors address the posited question by marshalling extant literature on expert and novice judgments and link these to concepts drawn from the cognitive sciences through the Brunswick Lens Model.

The authors identify a number of heuristics that may bias the going concern decision, based on the work of Kahneman and Tversky among others. They conclude that experience mitigates the unintentional consequences played by heuristic biases.

The conclusions have implications for the education and training of auditors, and for the expectation gap. They suggest that both awareness of factors that affect understanding of auditing reports and greater attention to training are important in reducing the expectation gap.

This paper develops additional theoretical understanding of factors that may impact the expectation gap. While there has been limited prior discussion of the impact of cognitive factors on differences between experts and novices, the paper significantly expands the range of factors discussed. As such, it should provide a stimulus to new research in this important area.

The use of choice-based, matched, and other stratified sample designs is common in auditing research. However, it is not widely appreciated that the data analysis for these studies has to take into account the non-random nature of sample selection in these designs. A choice-based, matched or otherwise stratified sample is a nonrandom sample that must be analyzed using conditional analysis techniques. We review five research streams in the auditing area. These streams include work on determinants of audit litigation, audit fees, auditor reporting in financially distressed firms, audit quality and auditor switches. Cram, Karan, and Stuart (CKS) (2009) demonstrated the accuracy of conditional analysis, compared to unconditional analysis, of nonrandom samples through the use of simulations, replications, and mathematical proofs. Papers since published have continued to rely upon questionable research, however, and it is hard for researchers to identify what is the reliability of a given work. We complement and extend CKS (2009) by identifying audit papers in selected research streams whose results will likely differ if the data gathered are analyzed using conditional analysis techniques. Thus research can be advanced either by replication and reanalysis, or by refocus of new research upon issues that should no longer be viewed as settled.

The going concern audit opinion is an audit opinion issued by an auditor to evaluate the company’s ability in maintaining the business continuity. The purpose of this paper is to discover the effects of audit client tenure, audit lag, opinion shopping, liquidity ratio and leverage on the going concern audit opinion.

The study used secondary data obtained from financial reports and independent audit reports published by Indonesian Stock Exchange (ISE) as well as Indonesian Capital Market Directory. Besides, the population of the study included manufacturing companies registered in ISE from 2009 to 2013. Further, the present study applied purposive sampling technique which resulted in 16 companies used as the sample of the study. Then the hypothesis was examined by applying logistic regression.

Results of the hypothesis examination indicated that the variables of opinion shopping and leverage affected the going concern audit opinion, whereas the variables of audit client tenure, audit lag and liquidity ratio did not affect the going concern audit opinion.

Results of the hypothesis examination indicated that the variables of opinion shopping and leverage affected the going concern audit opinion, whereas the variables of audit client tenure, audit lag and liquidity ratio did not affect the going concern audit opinion.