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Prior research provides evidence that firms make accounting choices to avoid violation of debt covenant provisions and the resulting costs of technical default. We extend this research by asking why some firms refrain from making accounting policy changes when faced with costs of technical default. We considered two possible explanations. First, we hypothesise that these defaulting firms may lack the flexibility to make accounting changes. Second, we hypothesise that these defaulting firms may lack incentive to change accounting methods. Results confirm prior research and indicate that defaulting firms make more accounting changes than non‐defaulting firms. The decision by defaulting firms to change or not change accounting methods during the three years ending in the year of a technical default of debt covenants can be explained in part by the ability of the firm and by the incentives of the firm to make a change.

Decision-making rationality is said to be bounded by managers’ cognitive capabilities. Recent studies indicate that accounting functions evolved to augment the cognitively bounded human brain in handling complex economic exchanges. The neuroscience discipline suggests that human brains have the ability to implement “automatic” processes of positive versus negative emotional stimuli to make rational decisions. Neuroscientific evidence shows that the activations in the ventral striatum decrease with negative emotional information/motives and increase with positive emotional information/motives. The authors, hence, argue that our understanding of the decision-making rationality in financial and managerial decisions could be enhanced by using a functional neuroimaging approach.

Decision-making rationality has been focal in debt covenant violation and earnings management research. The contracting theory predicts a relationship between managers’ decisions and the proximity of violating debt covenants. However, no prior research has investigated brain activities associated with the evaluation of debt covenant violation and earnings management. Meanwhile, in another strand of research, there is an extensive prior literature concerning the consequences of managers’ decisions and the use of accounting information in relation to their evaluative style, i.e., supervisory style. The authors argue that the relationship between the proximity to debt covenants violation and earnings management incentives is contingent upon managers’ supervisory style. However, no previous research has examined the impact of the supervisory style on earnings management in the context of the proximity to debt covenants violation and other earnings management incentives.

In this research note, we argue that neuroaccounting could be relied on to examine the relationship between the proximity to debt covenants and earnings management, contingent upon managers’ supervisory style, by capturing brain activities. The adoption of the neuroscience functional neuroimaging approach in this field should contribute to the understanding of managers’ behaviors and provide implications for research and practitioners. The goal of this research note is to provide a new avenue for future research in this field.

Recent bankruptcy research uses hazard models and extensive samples of companies. The large samples used have precluded the inclusion of a variable related to companies' loan default status in the models. With a sample limited to financially distressed companies, the authors aim to examine if results differ when loan default status and/or audit opinion variables are omitted from hazard bankruptcy prediction models.

The sampling frame is publicly traded US companies, consisting of 111 bankrupt and 310 matching companies from 2003 to 2007. The study applies logistic regression to choose variables for parsimonious bankruptcy prediction models to validate hypotheses. Loan default status and/or audit opinion variables are included as potential predictive variables along with variables included in previous hazard bankruptcy prediction models.

Results reveal that loan default and audit opinion variables: improve the predictive accuracy for financially distressed samples with hazard model characteristics; and change the significance on some variables included in previous hazard models.

Auditors' propensity to issue going‐concern modifications varies over time. To allow manual collection of loan default status information, the authors' sample was limited. Consequently, their results may not be generalizable to other bankruptcy hazard models.

Results from hazard models that do not include loan default status or auditor opinion variables should be interpreted with caution. Auditors might improve their going‐concern modification decisions by attributing more importance to loan default status. Also, the auditor's opinion adds incremental bankruptcy risk information to lenders and investors.

Recent bankruptcy research uses hazard models and extensive samples of companies. However, these studies omit a potentially important variable available to financial statement users, loan default status. The authors demonstrate that including variables for loan default status and auditor's opinion improves bankruptcy prediction models and can change conclusions drawn about other variables.

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.

The purpose of this paper is to provide a meta‐analysis of the effect of: auditor and audit‐related variables; and firm‐specific variables on auditors' propensity to issue modified audit opinions. Auditor and audit‐related variables include Big N affiliation, audit firm industry specialization, audit firm and audit partner tenure, provision of non audit services and audit report lag. Some of the important firm‐specific variables include firm size, leverage, and profitability.

The Stouffer combined test is employed as the meta‐analysis technique for this paper. The test produces a z‐statistic that can be used to test the direction and significance of the effect of the hypothesized variables on the propensity of auditors to issue modified audit opinions. A total of 73 published studies are aggregated from 1982 to 2011.

Meta‐analysis result reveals that the effect of audit and auditor‐related variables on audit opinion decisions is far from conclusive. Big N affiliation and audit report lag variables are found to be positively related while the association between non‐audit fees and modified audit opinion decisions is negative. However, the significant effect of non‐audit fee variable is found only in non US studies. Evidence on the effect of firm‐specific variables on auditors' propensity to issue modified audit opinions is broadly consistent with hypotheses formulated in the published studies.

Meta‐analysis statistically aggregates results across individual studies and corrects for statistical artefacts like sampling and measurement error and, thereby, provides much greater precision with respect to the findings, compared with narrative reviews. The findings should be relevant for the current project on audit reporting initiated by the International Auditing and Assurance Standards Board (IAASB).

Audit opinion formulation is a complex procedure that culminates in the issuance of appropriate audit opinions. This paper adds value to the strand of audit opinion formulation research by documenting that some of the variables are more significant in explaining auditors' modified audit opinion decisions compared to other variables.

T Education is a leading educational science and technology enterprise in China with technology-driven, talent intimacy and quality leadership as the core development objectives. Since its inception, it has been committed to creating better learning experience for children. As the predecessor of T-education, X-education was founded in Beijing in 2003. At first, it mainly provided after-school math counseling for school-age children. Over the past 10 years, its business has been expanding, covering almost every aspect of school-age education. This case studies accounting issues and business ethics challenges that firms may face when they transform from a single (traditional education) line of business to a multiple channel business.

Sukuk restructuring primarily aims at offering a debtor more latitude, in form and time, to settle his obligations. To meet Shari’ah requirements of transferring assets to Sukuk holders in asset-based Sukuk, the originator usually transfers the beneficial ownership to the issuer special purpose vehicles (SPV). However, in asset-backed Sukuk, the originator sells the underlying asset to an SPV and Sukuk holders do not have recourse to the originator in the event of defaults. Among some key unresolved Shari’ah issues in this regard is whether a change of contract necessitates entering a new contract. Other related issues that conflict with the tenets of Shari’ah are: (1) Sukuk structuring on tangible assets and debts; (2) receiving the full title by the Sukuk holders to the underlying assets in the event of default in case of securities that are publicized as asset backed; (3) Sukuk’s similarity with interest bearing conventional bonds: (a) capital guarantee by the originator or third party, (b) the originators’ promise to repurchase Sukuk at face value upon their redemption, and (c) providing internal and external credit enhancement. The Shari’ah-compliance of the above-mentioned clauses and structures of Sukuk remain debated among the Shari’ah scholars. Based on some specific cases, this study examines the Shari’ah viewpoint on sukuk restructuring and potential solutions to these unresolved Shari’ah issues in light of the past and recent declaration of some Sukuk defaults as non-Shari’ah complaints. Undoubtedly, resolution of these and other unresolved issues pertaining to Sukuk defaults can help strengthen the confidence of investors in Islamic capital market structures.

In this study, a panel of 74,128 Italian SMEs was analyzed to verify whether any syndromes could be identified and defined through financial ratios. Defining relevant syndromes (i.e. the set of correlated signs and symptoms often associated with a particular disorder) can be of importance for assessing which specific intervention can solve a firm's difficulties.

To identify the main syndromes involved in company defaults, firstly, financial data on defaulted firms for each of the main economic sectors were examined through a cluster analysis; the results obtained for each sector were then compared to verify whether syndromes recur across sectors. Finally, the effects of each syndrome were compared with possible default causes, as described by previous literature.

Results show that a significant share of corporate insolvencies is characterized by a set of recurrent signs and symptoms so that the main syndromes can be identified. The results also show that these syndromes recur across sectors, even if specific values characterize each sector.

The approach adopted in this study sets a new direction for the analysis of default risk, as the study shows that certain key syndromes can be defined and described, and the study suggests that different problems can induce different risk patterns. Further analyses of other samples could confirm whether the same syndromes recur over countries and over time.

This is the first study aimed at identifying and describing the syndromes affecting SMEs, conducted by means of balance-sheet ratios.

The importance of fuzzy logic (FL) in approximate reasoning, and that of default logic (DL) in reasoning with incomplete information, is well established. Also, the need for a commonsense reasoning framework that handles both these aspects has been widely anticipated. The purpose of this paper is to show that fuzzyfied default logic (FDL) is an attempt at creating such a framework.

The basic syntax, semantics, unique characteristics and examples of its complex reasoning abilities have been presented in this paper.

Interestingly, FDL turns out to be a generalization of traditional DL, with even better support for non‐monotonic reasoning.

The paper presents a generalized tool for commonsense reasoning which can be used for inference under incomplete information.