Going-concern Opinion Research Articles

The Impact of Client Bankruptcies on Auditors’ Judgment and Future Audit Engagements

We examine whether and how engagements with bankrupt clients (i.e., bankruptcy experiences) affect auditors’ behavior in future engagements. Using a large sample of Swedish auditors-in-charge (AICs), we find that AICs’ bankruptcy experiences are positively related to the issuance of going-concern opinions to financially distressed clients, audit fees, and clients’ earnings quality. Our evidence implies that such experiences increase AICs’ conservatism and professional skepticism and contribute to higher audit quality. We also show that AICs’ bankruptcy experiences are associated with more conservative client management strategies – the lower (higher) likelihood of accepting (resigning from) financially distressed clients. Furthermore, we find that the impact of bankruptcy experiences on AICs’ decision-making is stronger when those experiences are more salient and recent, as well as when they are followed by a sanction. Overall, our findings indicate that AICs who have experienced client bankruptcies deliver higher audit quality and exhibit a greater level of conservatism in client selection, providing novel evidence on how individual auditors’ auditing styles are shaped by their professional experiences.

Pengaruh Audit Tenure, Debt Default tehadap Penerimaan Opini Audit Going Concern pada Perusahaan Manufaktur Sektor Aneka Industri yang Terdaftar di Bursa Efek Indonesia Tahun 2017-2021

This study aims to find out how tenure and debt default audits affect going-concern audit opinions. This research focuses on manufacturing companies in the various industrial sectors listed on the Indonesia Stock Exchange for the 2017-2021 period. The purposive sampling method was used to select the sample in this study, namely 49 companies. Based on the process of data collection, data processing and data testing, the overall summary of the results of the research is presented from the interpretation of the data, namely the tenure audit variable positively influences acceptance of going-concern opinions but is not significant so that it is stated that tenure audits do not influence acceptance of going-concern opinions. concern. Meanwhile, the debt default variable has a positive and significant effect so that it can be stated that debt default has an influence on receiving a going concern opinion.

Practitioner Perspectives on Going Concern Opinion Research and Suggestions for Further Study: Part 1—Outcomes and Consequences

SYNOPSIS Auditing researchers rarely engage practicing auditors regarding the phenomena examined, or conclusions reached, in academic research. In an attempt to bridge this gap, we report on the outcomes, insights, and observations from focused interactions with Dutch audit practitioners regarding their perspectives on recent research regarding auditor going concern opinion (GCO) decisions. We provided practitioners with a summary of some of the most salient recent GCO research findings and the goals of our subsequent discussions were to (1) obtain practitioners’ responses to the research findings, and (2) identify relevant issues for future study from the perspective of practitioners. Accordingly, we report on our discussions with practitioners and provide a summary of practitioner-informed GCO-related future research topics. In this first of a two-part sequence, we provide background information relating to our practitioner interactions, and summarize our discussions pertaining to GCO outcomes and GCO consequences, as well as future research. JEL Classifications: M42.

Practitioner Perspectives on Going Concern Opinion Research and Suggestions for Further Study: Part 2—Reporting Environment and the Decision-Making Process

SYNOPSIS Auditing researchers rarely engage practicing auditors regarding the phenomena examined, or conclusions reached, in academic research. In an attempt to bridge this gap, we report on the outcomes, insights, and observations from focused interactions with Dutch audit practitioners regarding their perspectives on recent research regarding auditor going concern opinion (GCO) decisions. We provided practitioners with a summary of some of the most salient recent GCO research findings. The goals of our subsequent discussions were to (1) obtain practitioners’ responses to the research findings, and (2) identify relevant issues for future study from the perspective of practitioners. Accordingly, in this second of a two-part sequence of articles, we discuss the outcomes of our interactions with practitioners related to the GCO reporting environment and the GCO decision-making process, as well as directions for future research. JEL Classifications: M42.

An Examination of the Terminal Year in an Auditor-Client Relationship

SYNOPSIS We examine the cost and consequences of switching auditors. Specifically, we consider several client costs (audit fees, going-concern opinions, and internal control opinions) in the last year of an audit engagement (“terminal year”). We find that outgoing auditors are more likely to charge higher audit fees, issue more going-concern opinions, and issue more adverse internal control opinions during the terminal years of their audits. These findings suggest that outgoing auditors gain greater bargaining power, are more likely to charge for additional hours of audit work, and are less likely to yield to client pressures. Overall, our results suggest that companies face real economic costs from the outgoing auditor in addition to the start-up costs of the incoming auditor. Data Availability: Data are publicly available from sources identified in the text. JEL Classifications: G31; G32; G33; M21.

Does the Audit Going Concern Opinion Really Matter? The Case of Egypt.

The auditor’s going concern opinion (GCO) is an opinion given by an auditor about a firm’s financial health. This opinion serves as an early warning system for the financial distress of client’s firm. The current research aimed to study the impact of the auditor’s going concern opinion (GCO) on stock prices in the Egyptian business environment. On a sample of 132 firms listed on the Egyptian Stock Exchange for the period 2016-2022 with a total of 759 firm-year-observations. In addition to the possible effect of two moderating variables associated with the main independent variables. Which is the expectation of GCO and perceived audit quality (AQ). We added the independent and moderating variables to the modified Ohlsen regression model to test for the value relevance of the GCO, and the effects of the moderating variables on the mentioned above relation. We found no evidence of a significant impact of the auditor’s GCO on the stock prices of companies listed on the Egyptian Stock Exchange, regardless of whether this opinion is expected or not. On the other hand, for the effect of perceived audit quality, we found a significant negative effect of GCO on stock prices for companies being audited by big 4 audit firms, which could be interpreted because of the reputation effect for such firms. Keywords: Going Concern Opinion – Financial Health – Audit Quality – Egypt.

The International Standards on Auditing and the Accuracy of Auditors’ Going Concern Disclosures: Evidence for Private Firms in a Low Litigious Environment

ABSTRACT This paper examines the effect of adopting the International Standard on Auditing (ISA) 570 on going concern (GC) disclosures in the audit report in a European environment characterized by low litigation and reputation risk. We exploit a natural experiment in Belgium, where the global GC standard ISA 570 replaced the local GC standard. We examine whether this shift in standards changed the accuracy of auditors’ GC disclosures. Using a sample of 30,339 stressed private companies with audited financial statements for periods ending on or after 15 December 2012 till 14 December 2016, our findings suggest that the adoption of the ISA 570 improves the accuracy of auditors’ GC disclosures. Specifically, we find that the implementation of the ISA 570 is associated with an 8 percent decrease in false positive misclassifications (GC opinion without subsequent bankruptcy), while the rate of false negative misclassifications (bankruptcy without prior GC opinion) remains unchanged.

The Effect Of Financial Condition, Company Growth, And Company Size On Going Concern Opinion Acceptance

This study aims to investigate the effect of financial condition, company growth, and company size on going-concern opinion acceptance. This research will use secondary data from the financial statements of companies listed on the Indonesia Stock Exchange (IDX) during 2020-2022. The research sample taken is a transportasion and logistic company selected by purposive sampling. 26 companies were chosen as the samples of this study. The method used is logistic regression analysis. The result of this research is that financial condition had a negative influence on the audit going concern opinion acceptance and the other company growth and company size do not have influence to the going concern opinion.

Do publicly traded companies engage in opinion shopping after receiving a going concern audit opinion? Evidence from U.S. firms in the post-SOX era

Audit opinion shopping continues to be of significant interest to regulators and is also of interest to investors and the public. This study examines whether in the post-SOX (Sarbanes-Oxley Act) era, publicly traded companies in the U.S. engage in the act of shopping for audit opinions after receiving a going concern opinion (GCO). We further examine whether auditor firm size (Big 4 versus non-Big 4) affects such activities. Using data from Compustat and Audit Analytics we identify financially distressed publicly-held U.S. firms between 2004 and 2015. Adopting the framework developed by Lennox (2000), we examine the difference in the probabilities between auditor switching and no-switching scenarios. We find evidence that public companies in the U.S. who receive GCOs are successful in shopping for clean audit opinions in a subsequent period. We also find that audit opinion shopping activities are more common among public companies who switch to non-Big 4 auditors as opposed to those who switch to Big 4 auditors. Our paper fills the gap in the literature by examining whether, in the post-SOX era, publicly-held firms in the U.S. engage in the act of shopping for audit opinions, after receiving a GCO.

How Management Disclosure and Auditor Disclosure Affect Auditor Liability: The Case of the Going Concern Financial Accounting Standard

SUMMARY A current FASB standard requires management to assess the ability of the entity to continue as a going concern (GC) and disclose any substantial doubt about such. Using contextualized experiments wherein the auditor does not issue a GC opinion for an entity that subsequently fails, we study the effects of management disclosure, increased management disclosure responsibility, and auditor disclosure on auditor blame, a proxy for auditor liability. Consistent with predictions based on the Culpable Control Model, we find (1) management disclosure of substantial doubt increases auditor liability; (2) when management has not disclosed substantial doubt, auditor liability is greater under higher management disclosure responsibility; and (3) including a GC-related critical audit matter (CAM) in the audit report mitigates auditor liability. These findings provide insights regarding consequences to auditors of management disclosure practices, specifically regarding the FASB’s GC standard and the efficacy of auditor disclosure via CAMs to mitigate those consequences. Data Availability: Data are available upon request.

Principles based accounting standards, audit fees and going concern: evidence using advanced machine learning

PurposeThe current study uses an advanced machine learning method and aims to investigate whether auditors perceive financial statements that are principles-based as less risky. More specifically, this study aims to explore the association between principles-based accounting standards and audit pricing and between principles-based accounting standards and the likelihood of receiving a going concern opinion.Design/methodology/approachThe study uses an advanced machine-learning method to understand the role of principles-based accounting standards in predicting audit fees and going concern opinion. The study also uses multiple regression models defining audit fees and the probability of receiving going concern opinion. The analyses are complemented by additional tests such as economic significance, firm fixed effects, propensity score matching, entropy balancing, change analysis, yearly regression results and controlling for managerial risk-taking incentives and governance variables.FindingsThe paper provides empirical evidence that auditors charge less audit fees to clients whose financial statements are more principles-based. The finding suggests that auditors perceive financial statements that are principles-based less risky. The study also provides evidence that the probability of receiving a going-concern opinion reduces as firms rely more on principles-based standards. The finding further suggests that auditors discount the financial numbers supplied by the managers using rules-based standards. The study also reveals that the degree of reliance by a US firm on principles-based accounting standards has a negative impact on accounting conservatism, the risk of financial statement misstatement, accruals and the difficulty in predicting future earnings. This suggests potential mechanisms through which principles-based accounting standards influence auditors’ risk assessments.Research limitations/implicationsThe authors recognize the limitation of this study regarding the sample period. Prior studies compare rules vs principles-based standards by focusing on the differences between US generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) or pre- and post-IFRS adoption, which raises questions about differences in cross-country settings and institutional environment and other confounding factors such as transition costs. This study addresses these issues by comparing rules vs principles-based standards within the US GAAP setting. However, this limits the sample period to the year 2006 because the measure of the relative extent to which a US firm is reliant upon principles-based standards is available until 2006.Practical implicationsThe study has major public policy suggestions as it responds to the call by Jay Clayton and Mary Jo White, the former Chairs of the US Securities and Exchange Commission (SEC), to pursue high-quality, globally accepted accounting standards to ensure that investors continue to receive clear and reliable financial information globally. The study also recognizes the notable public policy implications, particularly in light of the current Chair of the International Accounting Standards Board (IASB) Andreas Barckow’s recent public statement, which emphasizes the importance of principles-based standards and their ability to address sustainability concerns, including emerging risks such as climate change.Originality/valueThe study has major public policy suggestions because it demonstrates the value of principles-based standards. The study responds to the call by Jay Clayton and Mary Jo White, the former Chairs of the US SEC, to pursue high-quality, globally accepted accounting standards to ensure that investors continue to receive clear and reliable financial information as business transactions and investor needs continue to evolve globally. The study also recognizes the notable public policy implications, particularly in light of the current Chair of the IASB Andreas Barckow’s recent public statement, which emphasizes the importance of principles-based standards and their ability to address sustainability concerns, including emerging risks like climate change. The study fills the gap in the literature that auditors perceive principles-based financial statements as less risky and further expands the literature by providing empirical evidence that the likelihood of receiving a going concern opinion is increasing in the degree of rules-based standards.

Dampak Pandemi Covid-19 Terhadap Aktivitas Pengauditan

This study investigates the impact of the COVID-19 pandemic on the auditing activities of Indonesian public companies. During a pandemic auditing activities are predicted to affect the auditor's opinion regarding going concern, audit delay, audit opinion, and the decision to use Big-4 versus non-Big-4 auditors. A sample was selected from tourism and manufacturing companies from 2018-2021 due to the severe impact of COVID-19 on these two sectors. The results of the quantitative analysis show that: 1) Auditors issued more going-concern opinions during the Covid-19 pandemic. 2) Auditors spent more time completing auditing tasks during the Covid-19 pandemic. 3) The number of qualified opinions was relatively similar in the pre-pandemic period and during the Covid-19 pandemic. 4) Clients using Big-4 KAPs decreased during the pandemic. In addition, the content analysis shows: 1) More going concern audit opinions should have been issued during the pandemic than currently available. Some auditors seem to deliberately not mention explicitly the impact of Covid 19 on the continuity of the company. 2) Only a small number of companies disclose the impact of Covid 19 on the company's financial performance.

CEO succession and auditor going concern decisions: An analysis of outsider CEOs and generalist skills

This study shows how external CEO succession can mitigate external auditors’ propensity to issue a going concern opinion (GCO) in financially distressed firms, particularly when the outsider CEO possesses higher generalist skills relative to the outgoing CEO. We show that our findings are unlikely to be driven by factors such as pre-succession restructuring, institutional ownership, and board quality that could trigger strategic changes and the appointment of an outsider CEO. Further, we provide evidence to rule out the possibility of our results being influenced by self-selection or omitted variables biases. We also find that the ability of outsider CEOs to mitigate going concern opinions in their appointment year significantly contributes to the subsequent improvements in the financial performance of distressed firms. Further tests on some mechanisms through which new external CEOs can reduce the likelihood of going concern opinions show that firms with such CEO appointees are more likely to reduce dividends and labor costs, issue equity, and reduce product similarity of prospector firms relative to their peers.

The Effect of Tenure, Specialization, Conservatism, and Fees on the Relationship between Going-Concern Opinions and Client Bankruptcy

ABSTRACT This paper uses the relationship between a going-concern modified audit opinion and client bankruptcy as an audit quality indicator to investigate factors that could affect audit quality. The setting is important because, although stakeholders often view bankruptcies without a preceding going-concern opinion as evidence of impaired auditor independence, there could be various reasons behind them. Using a matched sample of bankrupt and nonbankrupt clients, this paper finds that the relationship is less positive when auditors are nonspecialists, allow more income-increasing discretionary accruals, or receive higher audit fees. These results suggest that auditors provide lower audit quality when they lack sufficient industry knowledge, are less conservative, or are more reliant on audit fees. Data Availability: Data are publicly available from the sources identified in the paper.

Aligning disclosure requirements for managerial assessments of going concern risk: Initial evidence from New Zealand

AbstractThis study examines the impact of the Financial Reporting Standard No. 44 New Zealand Additional Disclosures (FRS 44) amendment issued by the New Zealand Accounting Standards Board (NZASB). The FRS 44 amendment aligned disclosure requirements for managerial assessments of going concern risk in financial reports with auditing standards for periods ending on or after 30 September 2020. We first present descriptive evidence on the frequency of going concern opinions (GCO), frequency of going concern issues identified as key audit matters (GCKAM), and frequency and content of managerial assessments of going concern risk (GCMA) before and after the FRS 44 amendment. Second, we show lower audit fees and shorter audit lags for financially distressed companies post‐FRS 44 implementation. This suggests that the harmonisation of accounting and auditing disclosure requirements alleviates tension during the going concern decision‐making process for affected companies, subsequently leading to reduced audit fees.

ANALISIS FAKTOR-FAKTOR YANG MEMPENGARUHI OPINI GOING CONCERN PADA PERUSAHAAN MANUFAKTUR PERIODE 2018-2020

This research was conducted to examine the effect of liquidity, profitability, growth,firm size, and previous year's audit opinion on the formation of going concern opinionson manufacturing sector that listed on the Indonesia Stock Exchange (IDX) in the 2018-2020 period. The sample was selected by purposive sampling method and the valid data were 32 companies. The data processing technique uses logistic regression analysis supported by SPSS software (Statistical Product and Service Solution) 25 program for Windows and Microsoft Excel 2019. The results show that liquidity, profitability, growth and firm size have no effect on the formation of a going concern opinion. While, the previous years audit opinion had a positive effect on the formation of a goingconcern opinion.

Effect of Audit Delay, Audit Fee, Audit Tenure, and Going Concern Opinion for Voluntary Auditor Switching

This study examines the effect of audit delay, fees, tenure, and opinion going concern on voluntary auditor switching in financial sector companies listed on the IDX from 2017 to 2022. This research uses a quantitative approach with secondary data and a purposive sample of 222 companies. using logistic regression analysis with SPSS version 26. The results revealed that audit delay has a significant positive effect, while audit tenure has a significant negative effect on voluntary auditor switching. However, audit fees and going-concern opinions have no significant effect on voluntary auditor switching

Non-GAAP Disclosure Following Going Concern Opinions

This paper examines whether firms change their non-GAAP reporting behavior after receiving a first-time going concern opinion (GCO). I find that the likelihood of disclosing non-GAAP earnings decreases while the quality of disclosed non-GAAP earnings increases following the receipt of a first-time GCO. The results are consistent with the notion that managers change their non-GAAP reporting behavior during the period of heightened investor scrutiny. Further analyses indicate that such changes in non-GAAP disclosure are more pronounced in firms with weaker corporate governance.

What does corporate sustainability reporting imply to auditors? Evidence from going-concern opinions and discretionary accruals

PurposeThis study aims to address the unanswered question of whether corporate sustainability has an impact on auditors’ overall judgment and to provide incremental evidence that corporate sustainability reporting has significant effect on financial auditors’ judgment.Design/methodology/approachFollowing prior research, the authors, respectively, apply auditors’ decisions on going-concern opinions and three discretionary accrual measures as proxies for auditor conservatism over financial risk and financial reporting risk. The authors collect corporate sustainability reporting and sustainability assurance data of U.S. firms from the global reporting initiative (GRI) database to construct and measure firms’ sustainability reporting activities.FindingsThe authors find that nonreporting firms are more likely to receive going-concern opinions than the reporting firms. In addition, reporting firms have a larger scale of discretionary accruals than their nonreporting counterparts. The authors also obtain consistent findings that sustainability assurance or accounting assurance providers strengthen the effect of sustainability reporting on auditors’ judgment.Research limitations/implicationsFirst, using discretionary accruals as measures of auditor conservatism is controversial, as accruals are the joint product by auditors and clients. Second, binary variables as a measure of sustainability reporting activities limit the inference. Lastly, the findings based on limited samples may weaken the external validity.Practical implicationsThe findings imply that firms engaging in sustainability activities are lower in financial or financial reporting risk. Firms can influence audit practitioners’ overall judgment through sustainability reports. Sustainability commitments and reporting have become a part of firms’ risk management.Social implicationsThe findings imply that sustainability reporting could become an integrated part of regulated corporate disclosure. Sustainability assurance reduces social costs by lending credibility to sustainability reports.Originality/valueThis paper provides incremental evidence that sustainability reports provide useful information and signals that influence auditors’ professional judgment. The findings also suggest that sustainability assurance strengthens auditors’ confidence in using sustainability information, thus amplifying the effect of sustainability reporting on auditors’ judgment.

Does explanatory language convey the auditor’s perceived audit risk? A study using a novel big data analysis metric

PurposeThe purpose of this study is to examine the relationship between explanatory language, audit fees and audit hours to demonstrate that auditors use explanatory language in audit reports to explain perceived audit risk.Design/methodology/approachThe authors construct the sentiment value, a novel audit risk proxy derived from audit reports, using big data analysis. The relationship between sentiment value and explanatory language is then investigated. The authors present the validity of their new metric by examining the relationship between sentiment value and accounting quality, taking audit fees and hours into account.FindingsThe authors first find that reporting explanatory language is positively related to audit fees. More importantly, the authors provide an evidence that explanatory language in audit reports is indicative of increased audit risk as it is negatively correlated with sentiment value. As a positive (negative) sentimental value means that the audit risk is low (high), the results indicate that auditors describe explanatory language in a negative manner to convey the inherent audit risk and receive higher audit fees from the risky clients. Furthermore, the relationship is strengthened when the explanatory language is more severe, such as reporting the multiple numbers of explanatory language or going-concern opinion. Finally, the sentiment value is correlated with accounting quality, as measured by the absolute value of discretionary accruals.Originality/valueContrary to previous research, the authors’ findings suggest that auditors disclose audit risks of client firms by including explanatory language in audit reports. In addition, the authors demonstrate that their new metric effectively identifies the audit risk outlined qualitatively in audit report. To the best of the authors’ knowledge, this is the first study that establishes a connection between sentiment analysis and audit-related textual data.