Paper examines the impact of a going-concernauditopinion on the corporate governance, measured by the changes in board of directors’ composition. External auditor’s opinion is used as a measure to address agency problems in companies. We examine this impact on sample of 55 companies listed on the Banja Luka Stock Exchange which have received going-concernauditopinion for 2013 financial reports. In this paper, the relationship between going-concernauditopinion and the corporate governance is investigated observing changes in board of director composition and additional requests for rigorous board performance evaluation after the shareholder’s assembly have received external auditor’s report. Results show that board of directors of companies that received going-concernaudit opinions have not suffered serious consequences such as rigorous board performance evaluation, reduction of board size or changes of board members. This highlights the importance of measures that need to be put in place in order to increase of external auditor’s role in corporate governance.
society’s conditions were tense from the political perspective and because of presidential elections and transfer of power, thus this research is limited from the contextual perspective since the majority of the members of the board of directors and corporate executives depended on the government, and could affect the financial reporting in a specific way. The first issue prevented us from reaching internal auditors of all listed companies at the securities exchange. It seems that the second limitation may have an impact on corporate performance, financial reporting quality, audit firm, and other factors.
companies with strong corporate governance are more likely to engage high quality auditors (Abbott & Parker, 2000), are more likely to support the auditor in a goingconcernopinion decision (Carcello & Neal, 2000), and are less likely to dismiss an auditor following the goingconcernopinion (Carcello & Neal, 2003). Moreover, Goodwin & Seow (2002) showed that strengthening external governance mechanisms can improve the quality of corporate financial statements, facilitate identifying and preventing operational errors, and causes the inadequacy of specific internal controls to be exposed. Similarly, DeFond and Hung (2004) indicated that a relatively strong external governance mechanism could alter the governance behaviors of a company, thereby affording greater protection for investors. In addition, Wen (2011) suggested that companies with an excessive amount of D&O insurance yield a lower earnings quality; as a form of external governance, this positively influences the decisions of auditors. Consequently, from the prospection of corporate governance, D&O insurance should be positively associated with auditors’ intention of issuing going-concern opinions.
The issue of audit tenure has been discussed since four decades age. Nowadays, due to the recent corporate scandals in the United States, the issue is discussed together with auditor independence that led to companies’ demise. Mandatory audit rotation debates come from the arguments that long audit tenure would create cosy relationship between auditors and clients and thus would lead to audit reporting failure such as in the case of bankruptcy. Therefore, this study attempts to investigate the situation in Malaysia whereby no empirical study using archival data has been done Specifically, the current study examines the impact of audit tenure on the issuance of goingconcernopinion. The result shows that audit firm tenure is positively significant in determining goingconcernopinion. Our findings also pointed that if a client never changed its auditor since listing, there is a tendency to issue a clean opinion though the client suffers apparent financial problems. Therefore, it can be said that, “auditor change would do well, but forcing an unrealistic auditor rotation might not yield what it hopes for”. For the benefit of auditing profession, we echo the importance of self-regulation and Laissez-faire practice in Malaysia as a better alternative than a mandatory auditor rotation. Further sensitivity analyses show that the results are robust to different measurements.
An auditopinion on the financial statements of a company became an important issue, attracting much public attention. Some argue that auditors are to blame for not being able to issue the appropriate goingconcernopinion report. They insist that the collapses of these companies may have been avoided if appropriate reports were issued. To give the public a clear signal, the minister of state PPN/Head of National Planning Board revealed that an accounting firm made an attempt to manipulate the data in Badan Penyehatan Perbankan Nasional (BPPN) (Edo, 2002) so as to avoid issuing a goingconcernopinion.
Descriptive statistics for control variables are also presented in Table 3. The average score of possibility of failure for the sample companies (z-score) is 0.48, with scores ranging from -11.99 to 16.15 (SD = 2.979). The average for every company is well below 1.8, which is the benchmark point of Altman’s z-score and which means there is a high likelihood that a company would collapse (Thai, Goh, Teh, Wong, & Ong, 2014). For variable non-first timer GC opinion recipients (NON1STGC), 11% of sample companies/observations are non- first timer GC opinion recipients, i.e., have received the same auditopinion in the immediate prior year. The third control variable debt default (DEFULT), measured as leverage (total liabilities/total assets), has an average of 62.36% (min = 2.02%, max = 329.20%). For audit size (ADSIZE), around 43% of sample companies are audited by big firms. The size of sample observations (CLTSIZE) ranged from RM0 to RM11.266 billion in sales revenue (average RM389.03 million). Forty five percent of sample companies are in the period of a later ISA570 (AUSTDD), and 74% of the sample companies are in the period when newer MCCG is effective. INDS is a nominal data for industry classification, and therefore, its mean, standard deviation, and minimum and maximum data as revealed in Table 3 are meaningless.
This paper investigates to what extent the disclosure of a goingconcernopinion (GCO) report affects the stock price performance of the announcing firm’s industry rivals. We find that, on average, GCOs lead to an important competitive effect, with investors earning around 0.37% on risk-adjusted basis at the event date and a further 1.54% over the first postGCO month. Our main contribution to the literature is showing that qualified audit reports significantly impact the risk/return characteristics of the announcing firm’s publicly-traded competitors. A few other studies already show that GCO firms earn strong negative abnormal returns both in the short- and longer-run (e.g., Fleak and Wilson, 1994; Taffler, Lu and Kausar, 2004; Kausar, Taffler and Tan 2009; Menon and Williams, 2010). However, little is known about how such acute and unambiguous bad news event is priced on industry rivals. Indeed, the four previous studies examining parallel questions we are aware of consider only a small number of GCOs and focus explicitly on particular industries. 1 This, however, is an important area of research as it may help shed further light on the importance of audit opinions and mandatory accounting information for the timing of transactions in financial markets.
that there could be substantial doubt about the entity to continue as a going-concern. Subsequently, SAS no.59 also requires auditors to consider management plans to mitigate the effects of these adverse conditions or events when assessing their client’s ability to continue as a going-concern. The impact on the auditopinion of contrary and mitigating factors in publicly available disclosures such as the financial press, 10-K’s or management discussions and analyses has also been documented in the going-concern literature (see Mutchler et al., 1997). Although the importance of strategic management plans is recognized in today’s auditing practice, research on the impact of forward-looking management plans on going-concern decisions is scant. Behn et al. (2001) recognized this caveat and provide evidence of the relationship between the likelihood of going-concern opinions and a company’s ability to obtain new financing and to reduce costs. After controlling for financial condition, size, default status, and the propensity to voluntarily disclose information, their results indicate that going-concernopinion decisions are strongly linked to publicly available mitigating information regarding certain management plans. In particular, plans to issue equity and to borrow additional funds exert the strongest association with the issuance of an unqualified opinion. Recently, Geiger and Rama (2003) report that companies are more likely to receive a modified report if they entered into a cost reduction plan or sold off significant assets. However, contrary to the findings of Behn et al. (2001), plans for the issuance of new debt or equity are not significantly associated with the auditor’s opinion type.
the functionality of the directing board due to better regulation and inspection of manager’s behaviors and decrease managers self-profit actions (Fama and Jenson, 1983; Jensen and Meckling, 1976). Therefore Equity could affect possibilities of companies being delisted. This study uses directors’ pledging ratio and director’s share holding ratio to evaluate share structure. Kesner (1987) and McConnell and Servaes (1990) indicated that equity ownership positively relates to firm performance. When company’s directors pledge the shares that they own to the bank, this is the same as retracting capital at an early stage but still hold entitlement to the company. The higher the directors’ pledge, the more distorted the company’s financial structure will be and thus higher possibility of the company being delisted. Fama and Jenson (1983) and Jensen and Meckling (1976) both indicated that the higher the ownership, the lower the agency cost, resulting in lower chances for managers to self profit. It is expected for companies with high director’s ownership, there is lesser possibility of the company being delisted. The rate of company failure announced after No.33 bulletin should be lower than companies that have been issued with goingconcern prior to the bulletin. With this influential factor in mind, a dummy variable is set. After the announcement of No.33 bulletin is 1 and before this period is 0, to control the effect of No.33 bulletin.
and significant toward going-concernopinion (GCO), which indicates that client importance has a positive association with the propensity to issue going-concernopinion. Several con- trol variables included in the Model 2 to con- trol other factors that may affect audit firms to issue going-concern reports. Companies with larger size (SIZE) have greater resources and are more likely to survive compared to smaller companies (Francis and Yu 2009), therefore we predict variable SIZE has a negative asso- ciation with GCO. Companies that received going-concernopinion on the previous year (PRIORGC) are more likely to receive going- concernopinion in the current year (Reynolds and Francis, 2001). CASH is a liquidity meas- ure that is the sum of cash and cash equiva- lent, scaled by total assets. Companies with more liquid assets have more resources to deal with financial difficulties, therefore we expect CASH coefficient is negative. Companies with high debt levels (LEV) and experience net loss in the current year (LOSS) are more likely to fail and more likely to receive going-concern reports, therefore, we predict LEV and LOSS coefficients have positive associations with GCO (Francis and Yu 2009).
going-concern decision is not systematically different for firms with a short tenure, such as start-up firms (Argenti 1976) and firms that frequently engage in “opinion shopping” (Carcello and Neal 2000; Lennox 2000). Including non- financial distress firms increases the power of my tests, but does not alter my inferences. Second, we limit our sample to a Big4 only Sample. Big 4 auditors have international reputations and are generally perceived to be more independent and provide better quality service than are non-Big 4 auditors (e.g. Simon, Ramanan, and Dugar 1986; Simon, Teo, and Trompeter 1992; DeFond and Jiambalvo 1993; Teoh and Wong 1993). If Big 4 auditors provide a higher quality service due to higher reputation concerns and litigation costs involved with Type I errors (incorrect going-concern reports), the impact of audit firm tenure on the likelihood of going-concern opinions would be less pronounced for firms with Big 4 auditors than for firms with non-Big 4 auditors. Therefore, we replicate our main results in Table 3 for a reduced sample with Big4 auditors only (untabulated). The results show a significantly positive coefficient on the interaction term CRISK*logTEN. Finally, we add back the observations prior to 2003 since prior literature indicates that auditors are more conservative and are more likely to issue GCs to bankrupt firms after 2001 in order to enhance their reputation, reduce insurance and litigation costs, or to reduce government intervention. To explore this possibility, we add back the observations before 2003. Results (untabulated) from using the full data from 2000 to 2013 yield qualitatively similar results as the main test. Therefore, we conclude that our main inference does not alter with all these alternative methods.
As shown in Figure 1, ISA 570 (2002) lasted eight years i.e. until its successor the ISA 570 (2010) was introduced. Ironically, the 2002 standard was effective for a long period of time even though significant events had happened particularly the billion dollar loss of stakeholders’ money contributed partly by poor audit quality (Enron, WorldCom, etc) and the issuance of Sarbanes-Oxley Act in 2002 (Bellovary, Giacomino, & Akers, 2007). The newly issued ISA 570 (2010) was a major departure from the former version. ISA 570 (2010) contains 24 paragraphs and ISA 570 (2002) contains 39 paragraphs, but, they are almost similar in thickness with the former having 16 pages and the latter has 19 pages (including appendixes) (International Federation of Accountants, 2010). Auditors’ responsibility has been heightened in ISA 570 (2010) from only to ‘consider’ the appropriateness of client’s GC assumption and disclosure practice in the earlier standard to “ obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the goingconcern assumption in the preparation and presentation of the financial statements and to  conclude whether there is a material uncertainty about the entity’s ability to continue as a goingconcern” (para. 6). Furthermore, the new ISA 570 enhances auditor independence 1 in deciding the appropriateness of GC assumption by promoting the auditor to communicate “their findings about the disability of client to continue as a goingconcern entity” with party that is in charge of governance like audit committee (para. 23). This is in line with Malaysian corporate governance promulgation such as MCCG 2007 (Securities Commission Malaysia, 2007) and Bursa Listing Rules (Bursa Malaysia, 2008) that require close working relationship between auditors and audit committee.
judgment by the auditor. Nowhere is this more clearly illustrated than in the auditor’s decision to issue an opinion modified for going-concern uncertainty to a financially distressed client. Issuing an opinion modified for going-concern uncertainty can be costly for the client as it can restrict access to funding sources, adversely impact the company’s stock market valuation, and can even hasten the company’s ultimate failure. Therefore, not surprisingly, clients typically do not like to receive any report other than a standard, unmodified audit report. Issuing an opinion modified for going-concern uncertainty can also be costly for the auditor because a disgruntled client that receives what is perceived to be an unwarranted going-concern modification is much more likely to switch to a different auditor resulting in a loss of revenues from both auditing and non-audit services. (Adeyemi & Uadiale, 2011). On the other hand, shareholders, lenders, creditors, regulators and other users of the financial statements rely on the auditor to give timely warning of impending corporate failure. The assessment of an entity’s ability to continue as a goingconcern is the responsibility of the entity’s management; and the appropriateness of management’s use of the goingconcern assumption is a matter for the auditor to con- sider on every audit engagement. Some financial reporting frameworks contain an explicit requirement for management to make a specific assessment of the entity’s ability to continue as a goingconcern, and standards regarding matters to be considered and disclosures to be made in connection with goingconcern.(ICAN,2006). In assessing whether the goingconcern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet date. The degree of consideration depends on the facts in each case. When an entity has a history of profitable operations and ready access to financial resources, a conclusion that the goingconcern basis of accounting is appropriate may be reached without detailed analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the goingconcern basis is appropriate.
The research approach for this study is content analysis, previously used in several other studies for analyzing comment letters to exposure draft published by the IASB or FASB (Yen et al., 2007; Tiron & Muller, 2009; Holder et al., 2013). The data used for the analysis comes from the answers to the 2 selected questions regarding GoingConcern basis of accounting audit reporting, addressed by the IAASB within the Exposure Draft. The Exposure Draft, published in July 2013, received a total number of 138 comment letters until November 2013, most of them coming from English-speaking countries, like the U.S., Canada and the U.K. These answers were published by the IAASB on their website, at the project webpage. A first step was the collection of data in order to construct a database of all the responses. As stated before, we have only selected the responses from comment letters issued by organizations, regulating bodies or individuals from within the EU, because our focus is to seek the opinion of EU users regarding audit changes. Thus, a total of 47 replies have been selected in our sample. Because the collected data features an unstructured character, given the fact that some of the boards’ questions required an open answer, the next step has been to inspect each comment letter, through a qualitative analysis of the text. Not all the respondents gave a specific answer to each question (or to all questions), and some have limited themselves only to the expression of a general opinion regarding the work plan of the Board. Thus, we have recoded the answers, as follows:
According to AU-C Section 570 (SAS No. 126), the auditor is responsible for evaluating “whether there is substantial doubt about the entity’s ability to continue as a goingconcern” within 12 months after a fiscal year end. The evaluation should be based on the “auditor’s knowledge of relevant conditions or events that exist at, or have occurred prior to, the date of the auditor’s report.” An auditor who identifies events and/or conditions that cause substantial doubt about the entity’s goingconcern assumption must collect supporting and/or mitigating evidence related to that doubt and evaluate its impact on the goingconcern assumption. In this study, we argue that CEO overconfidence should be evaluated as one of the determinants affecting auditors’ GCO decisions because CEOs are central to the plans firms implement to escape from financial distress. Overconfident CEOs can be positively valued if auditors agree on the overconfident CEOs’ optimistic view of the future performance of current investments and believe that the overconfident CEOs are capable of executing a management plan for reviving from financial distress. The recent psychology study in Anderson et al. (2012) suggests that overconfident managers can attain high social status because they can be erroneously viewed as more competent than they really are. However, other studies (e.g., Malmendier and Tate, 2005, 2008; Ben-David et al., 2010) reveal the negative aspects of overconfident CEOs, such as unnecessary mergers and acquisitions and excessive investment, including investments with negative net present value. Therefore, auditors can negatively value overconfident CEOs because they are less likely to take appropriate action rationally for their firm’s future survival. Consequently, auditors who put more weight on the negative (positive) aspects of overconfident CEOs are more (less) likely to issue GCOs to financially distressed firms. If one aspect does not dominate the other, managerial overconfidence will not influence the auditors’ GCO decision. How auditors perceive the overconfident CEOs of firms with going-concern uncertainty when making a GCO decision is thus an important and interesting open empirical question.
Independent auditor stated auditgoingconcernopinion on the company’s financial statement due to doubted of the entity’s sustainability (PSA No.30, section 341, 2011). A few factors affect auditgoingconcernopinion acceptance. Santosa and Wedari (2007) found that audit quality, leverage, prior auditopinion, size and growth of the entities had significant relationship on the auditgoingconcernopinion. Based on the same model, this research was aimed to test which factors had dominant impact to the auditgoingconcernopinion of companies listed in Indonesia Stock Exchange besides manufacturing companies, banks and other financial institution. Samples identification was based on the result of purposive sampling for 2010 to 2012. The result provide evidence that leverage and prior auditopinion had significant influences to the auditgoingconcernopinion, meanwhile, quality audit, growth and size had no significant influences.
Goingconcern is base assume in making financial report, a company can be assumed not intended or wish to melikuidasi or materially decrease usahanya scale (SAK, 2007). The judgement about company financial health is not the only one goal from audit proses that did by auditor. But, auditors have responsibility to evaluate goingconcern. This has been arranged in Statement on Auditing Standards No. 59 (AICPA, 1988) declares that auditors should decide whether they sure that their client can survive or not in the future. Beside arranged in Public Accountant Professional Standart (PAPS), Auditing Interpretation Statement Standart (AISS) No. 30 of Independent Auditor’s Report about The Getting Worst of Indonesia Economy Crisiss to Company’s Continuity. AISS considers auditors need to consider three things, namely (1) Auditor’s obligation to give advise to the clients in uttering economy effect (if necessary) to company’s ability to mantain its continuity. (2) Utterance of next event that probably appear as the effect of that economic condition, and (3) Modify audit standart form report if that economy worsting condition impact to company’s ability in holding out its continuity . Some factors that cause uncertainty of continuity (Arens, 1997), namely: (1) Continually getting big loss or unsufficient capital, (2) Company inability to pay its liabilities at due date in short period of time, (3) The losing of main customers, disaster than hasnot insuranced, and (4) Lawsuit, law reinforcement or the similar problem happened that can endanger company’s ability to run the bisnis.
3. The test for moderation by using the method of absolute variance value simultaneously showed that the variable of audit switching was not moderating variable which indicated that it could not strengthen or weaken the correlation of the variables of auditor’s quality, auditopinion in the previous year, firm growth, firm size, audit lag, and debt default with the acceptance of opinion about goingconcern at the property and real estate companies in the period of 2009-2016. The testing of moderating variable in this research used audit switching which influenced could be tested toward independent variables partially in order to find out whether the variable of audit switching could strengthen or weaken the interaction among the variables. Based on the result of the test on the absolute variance value, it was found that:
GCMOs are not identical because professional auditing standards require that if the auditor determines that there is substantial doubt about the firm’s ability to continue as a goingconcern, that the auditor must mention the pertinent conditions and events giving rise to such doubt in their audit report (PCAOB, 2015a). However, only a few studies have examined the reasons for the auditor rendering a GCMO and the varying influence on report users. In one of the first studies, Menon and Williams (2010) find that GCMOs indicating the company is having difficulty obtaining financing, which they classify as a severe reason for a GCMO, experience greater negative stock price reaction than GCMOs for other reasons. Chen et al. (2016) provide evidence that different reasons for the GCMO (for example financing difficulties, operating difficulties, other) lead to different loan contract conditions (for example interest rate, maturity, number and type of loan covenants). These studies highlight the informative value of the different GCMO reasons, and provide empirical support that what auditors communicate in the GCMO is not a simple binary decision to modify or not modify their report.
Quality audits by Komalasari (2004) defined as the probability of errors and irregularities that can be detected and reported. The probability of detection is affected by the issues that refer to the audit conducted by the auditor to generate opinion. Issues relating to the issue of the audit is the competence of auditors, requirements relating to audit and reporting requirements. The experience, knowledge and academic possessed great influence on the amount of auditor Public Accounting Firm. Where is the improvement of the quality of the audited will take effect from the client to select a public accounting firm that can be trusted in its performance capabilities.