Consequences of Going Concern Opinion for Financial Reports of Business Firms and Capital Markets with Auditor Reputation as a Moderation Variable - An Experimental Study

Abstract

1. Introduction In Indonesia, based on SA (Audit Standard) Section 570-Business Continuity (IAPI, 2013), auditors are allowed to publish an opinion that contains a description of the auditor's doubts on the ability of a company to maintain its viability. This opinion is known as going concern opinion (GCO). Conditions and events that trigger the auditor to issue GCO are also stated in SA 570. Research on the GCO usually focuses on (1) auditor judgment in determining whether the auditor needs to modify the audit opinion by giving an explanation about the viability, (2) errors that may occur in the issuance of GCO, (3) individual GCO consequences for companies receiving GCO (announcing firms), (4) GCO consequences for other companies in the same industry (rival firms). There have not been many researchs studying the possibility of the GCO to play an important role in the stabilization of the stock price in a stock market or to play an important role in enhancing the credibility of financial statements for other companies which do not receive GCO (Tuttle and Vandervelde, 2009). There has been no study that simultaneously examines the consequences of GCO for announcing firms, rival firms, and the overall capital market using the same data source. Therefore, this study will examine the consequences of GCO for announcing firms, rival firms and the capital market as a whole. Researches on the consequences of GCO for announcing firms generally show that according to investors the GCO is relevant to assess the companies' share price. O'Reilly (2010), who examined the consequences of GCO for announcing firms argues that announcing firms experienced a significant decline in stock prices. Stock-price estimation made by investors was much reduced when a company received GCO than when it received an unqualified opinion. This indicates that GCO is bad news for announcing firms. GCO consequences for rival firms indicate one of two phenomena, namely competitive effect or contagion effect. Competitive effect occurs when rival firms get the positive impact from other companies in the same industry which receive GCO (indicated by an increase in the stock prices of rival firms). The contagion effect occurs when rival firms get the negative impact of the presence of other companies in the same industry which obtain GCO (indicated by a decrease in the stock prices of rival firms). Researches on the consequences of GCO for rival firms generally show support for competitive effect. Elliott et al. (2006) show that at the moment when certain companies receive GCO in the real estate industry, investors will move their business and their holdings to rival firms. It can be stated that Elliott et al. (2006) show more support for the competitive effect. This indicates that GCO is good news for rival firms. Coelho et al. (2012) show that rival firms experience positive abnormal returns and announcing firms experience negative abnormal returns on the date of the audit report. It can be concluded that Coelho et al. (2012) show more support for the competitive effect than the contagion effect. This indicates that GCO is good news for rival firms, but is bad news for announcing firms.The possibility as to whether the competitive effect can be turned into contagion effect has been rarely investigated. This study used an experimental method to manipulate the number of GCOs in every industry. Thus, the results should show whether at the time when the number of GCOs increases in an industry, the benefits gained by rival firms will decrease. Research on the consequences of GCO for the stock market as a whole is still rarely conducted. This is due to the difficulty in obtaining the required data. Therefore, Tuttle and Vanderveldes (2009) used an experimental method to manipulate GCO by making two experimental markets (one with GCO and the other without GCO). The market with GCO was a capital market in which there was GCO, while the market without GCO was a capital market in which there was no GCO. …