Turnaround Initiatives and Auditors' Going-Concern Judgment: Memory for Audit Evidence

Abstract

SUMMARY: This study uses an experiment to investigate how management turnaround initiatives influence auditors' going-concern decisions for financially distressed firms. Using mediation analysis, we are able to distinguish between a direct effect of strategic and operating turnaround initiatives on going-concern judgment and a mediated effect through auditors' evaluation of subsequent financial evidence. Results from the experiment indicate that operating turnaround initiatives (e.g., cost cutting) are associated with lower relative recall of positive financial evidence and a higher likelihood of receiving a going-concern opinion. Further, we find no evidence of a direct link between client operating or strategic initiatives and an auditor's going-concern judgment. Data Availability: Data are available from the authors upon request.