WWW.BOOK.DISLIB.INFO
FREE ELECTRONIC LIBRARY - Books, dissertations, abstract
 
<< HOME
CONTACTS



Pages:   || 2 | 3 | 4 | 5 |   ...   | 10 |

«Audit Reporting for Going-Concern Uncertainty: A Research Synthesis Elizabeth Carson, Neil L. Fargher, Marshall A. Geiger, Clive S. Lennox, K. ...»

-- [ Page 1 ] --

Auditing: A Journal of Practice & Theory American Accounting Association

Vol. 32, Supplement 1 DOI: 10.2308/ajpt-50324

pp. 353–384

Audit Reporting for Going-Concern

Uncertainty: A Research Synthesis

Elizabeth Carson, Neil L. Fargher, Marshall A. Geiger, Clive S. Lennox,

K. Raghunandan, and Marleen Willekens

SUMMARY: In this synthesis we review research on going-concern modified audit opinions (GCOs) and develop a framework to categorize this research. We identify three major areas of research: (1) determinants of GCOs that include client factors, auditor factors, auditor-client relationships, and other environmental factors; (2) accuracy of GCOs;

and (3) consequences arising from GCOs. We identify method-related considerations for researchers working in the area and identify future research opportunities.

Keywords: going-concern; audit reporting; bankruptcy.

INTRODUCTION

T he global financial crisis starting in 2007 has resulted in a significant increase in company failures and has generated renewed interest in auditor reporting on financially troubled clients. Issues of immediate concern relate to the exceptional risks faced by companies at the height of the liquidity and credit problems during 2007 and 2008 and the role that auditors had to Elizabeth Carson is an Associate Professor at The University of New South Wales, Neil L. Fargher is a Professor at The Australian National University, Marshall A. Geiger is a Professor at the University of Richmond and an Academic Fellow at the SEC, Clive S. Lennox is a Professor at Nanyang Technology University, K. Raghunandan is a Professor at Florida International University, and Marleen Willekens is a Professor at Katholieke Universiteit Leuven.

We greatly appreciate the research assistance of Afsana Hassan, Christophe Van Linden, Ashna R. Prasad, Qingxin Ye, and Qiang Wei. We thank Bill Read for the helpful provision of data.

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of Marshall A. Geiger and do not necessarily reflect the views of the Commission or of the authors’ colleagues upon the staff of the Commission.

To facilitate the development of auditing and other professional standards and to inform regulators of insights from the academic auditing literature, the Auditing Section of the American Accounting Association (AAA) decided to develop a series of literature syntheses for the Public Company Accounting Oversight Board (PCAOB). This paper (article) is authored by one of the research synthesis teams formed by the Auditing Section under this program. The views expressed in this paper are those of the authors and do not reflect an official position of the AAA or the Auditing Section. In addition, while discussions with the PCAOB staff helped us identify the issues that are most relevant to setting auditing and other professional standards, the author team was not selected or managed by the PCAOB, and the resulting paper expresses our views (the views of the authors), which may or may not correspond to views held by the PCAOB and its staff.

Editor’s note: Accepted by Jeffery R. Cohen.

–  –  –

play in warning about such problems. These issues have sparked a series of high-level inquiries into the role and effectiveness of independent auditing in the U.S. and internationally (e.g., PCAOB 2011;

European Commission 2010; House of Lords 2011; FRC 2011), with particular interest directed to the auditor’s assessment and reporting on a company’s ability to continue as a going-concern.

The purpose of this review is to synthesize and discuss prior academic literature pertinent to the auditor’s decision to issue an opinion modified for going-concern uncertainty (hereafter, GCO). We limit our review to some of the major findings from the auditing literature over the past four decades.

We develop a framework that structures our categorization of the main themes explored in the extant literature (Figure 1; see Carson et al. [2012] for a more complete discussion of GCO research). Since early research found that auditors typically do not have difficulty identifying companies in financial distress that may be candidates for a GCO (Kida 1980; Mutchler 1984), most research focuses on the GCO decision for samples of distressed clients where going-concern uncertainty is likely to be an issue.

Therefore, in our review of the literature we focus more specifically on the determinants of GCOs (in the second section); the accuracy of GCOs issued, or not issued, by auditors (in the third section); and the consequences of GCOs on clients and auditors (in the fourth section). Based on our synthesis, we also discuss research-method-related considerations pertaining to GCO studies (in the fifth section) and propose avenues for future research (in the sixth section).

DETERMINANTS OF GCOs

Under SAS No. 59 (AICPA 1988), auditors have a responsibility to evaluate whether there is substantial doubt regarding an entity’s ability to continue as a going-concern for a reasonable period of time (not exceeding 12 months from the balance sheet date). Under U.S. Generally Accepted Accounting Principles (GAAP), the going-concern basis for presentation of financial statements is assumed in the absence of information to the contrary. Accordingly, auditors’ evaluations are made based on knowledge obtained from audit procedures, and knowledge of conditions and events existing at or prior to the completion of fieldwork that relates to the validity of the going-concern assumption and the use of the going-concern basis for preparing the financial statements. Auditors are required to obtain information about management’s plans to mitigate any concerns and assess the likelihood of successful implementation of such plans. If the auditor still has substantial doubt about the entity’s ability to continue as a going-concern, the auditor should consider the adequacy

–  –  –





of management’s disclosures in the financial statements and the auditor must modify his/her opinion to include an explanatory paragraph outlining the reasons for concern.1 Our framework commences with the auditor’s assessment of an underlying uncertainty regarding the going-concern assumption, and moves to the observable factors that explain an auditor’s decision to issue a GCO. As noted earlier, little extant research solely addresses the auditor’s identification of companies experiencing financial pressure such that they may violate the going-concern assumption. The vast majority of archival research to date has attempted to identify which characteristics (client, audit firm, etc.) are associated with auditors rendering a GCO to an audit client.

As a foundation for our subsequent discussion, we first present data on the overall frequency of GCOs issued in the U.S. We then proceed to classify the archival literature on the determinants of GCOs into four broad categories: client factors, auditor factors, auditor-client relationship factors, and environmental factors.2 Overall GCO Rates We review the overall frequency of GCOs for the period using data from Audit Analytics.

Audit Analytics covers all SEC registrants including trust funds, pension funds, and other entities that are not publicly traded, but we are more interested in companies that are publicly traded. In addition, we require information on market capitalization in order to investigate how the GCO frequency varies by company size. We exclude any audit reports that are signed after a company files for bankruptcy (Chapter 7 or Chapter 11). The resulting sample comprises 88,359 company year observations over the 11-year period 2000 to 2010.

The results are reported in Table 1. The overall frequency of GCOs increases from 9.82 percent in 2000 to 13.74 percent in 2001 and 16.57 percent in 2002. Similarly, Geiger et al. (2005) and Sercu et al. (2006) find that auditors are more likely to issue GCOs after December 2001. These findings are consistent with auditors reporting more conservatively following the events of 2001– 2002; i.e., the Enron scandal, the indictment of Andersen, and the passage of SOX. It is also consistent with a significant increase in insurance- and other liability-related costs during the postSOX period (Rama and Read 2006). Since 2002, there has been only a marginal increase in the overall GCO frequency from 16.57 percent in 2002 to 17.01 percent in 2010.

Table 1 further indicates that it is generally the smaller companies that receive GCOs. The GCO frequency is 36.70 percent among companies whose market capitalizations are no greater than $75 million. In contrast, the GCO frequency is 3.66 percent for companies whose market capitalizations are between $75 million and $500 million. Among the very large companies (market capitalizations in excess of $500 million), the GCO frequency is just 0.33 percent. It is clear from Table 1 that the increase in the GCO frequency is driven by firms whose market capitalizations are less than $500 million. Among companies whose market capitalizations are no greater than $75 million, the GCO frequency more than doubles from 20.14 percent in 2000 to 42.08 percent in

2010. Likewise, among companies whose market capitalizations are between $75 million and $500 million, the GCO frequency more than triples from 1.25 percent in 2000 to 4.91 percent in 2010. In contrast, there is virtually no change in the GCO frequency among the companies whose market capitalizations are in excess of $500 million (0.33 percent in both 2000 and 2010).

If the auditor believes that adequate disclosure is not provided in the financial statements and notes, then he/she is required to issue a qualified report due to a departure from GAAP.

While we focus on archival research, we do not wish to understate the considerable potential for further behavioral and qualitative research on auditor judgment and decision making with respect to GCOs.

–  –  –

GCOs and Bankruptcy Next, we examine the incidence of bankruptcy within our sample. An observation is coded as going ‘‘bankrupt’’ if the firm files for Chapter 7 or Chapter 11 within one year of the audit opinion signature date. This yields a sample of 396 bankrupt observations. We then examine whether the audit opinion issued immediately prior to the bankruptcy filing contained a GCO. Table 2 finds that

60.10 percent of bankruptcy filings are preceded by opinions that are modified for going-concern uncertainties. This is similar to prior studies that examine the audit opinions issued to companies prior to bankruptcy. There are 87,963 surviving observations, i.e., where companies do not file for bankruptcy within one year of the audit opinion date. The proportion of surviving observations that receive GCOs is 15.71 percent. Mirroring the increase in the GCO frequency that was shown in Table 1, Table 2 finds that the proportion of surviving observations that receive GCOs increases from 9.77 percent in 2000 to 16.44 percent in 2002 and 16.83 percent in 2010. Finally, Table 2 shows that the vast majority of firms that receive GCOs do not file for bankruptcy within 12 months of the audit opinion date. In fact, 98.31 percent of firms survive for at least 12 months after they are issued a GCO.

Again, as shown in Table 2, the proportion of bankrupt firms that receive a prior GCO (GCO%) is 60.10 percent—i.e., of soon-to-be-bankrupt firms, 60.10 percent receive GCOs in their final reports prior to bankruptcy. In contrast, the proportion of surviving firms that receive a prior GCO (GCO%) is just 15.71 percent. This is consistent with a self-fulfilling prophecy: a GCO is more likely to be issued to a company that will file for bankruptcy than to a company that will

–  –  –

Source: Audit Analytics.

An observation is coded as ‘‘bankrupt’’ if the firm files for Chapter 7 or Chapter 11 within one year of the audit opinion date. An observation is coded as ‘‘surviving’’ if the firm does not file for Chapter 7 or Chapter 11 within one year of the audit opinion date.

n ¼ number of observations; GCO% ¼ percentage of firm observations receiving a going-concern audit opinion; and Surviving% ¼ percentage of going-concern observations that do not file for Chapter 7 or Chapter 11 within one year of the audit opinion date.



Pages:   || 2 | 3 | 4 | 5 |   ...   | 10 |


Similar works:

«2 SWR2 Tandem – Manuskriptdienst Sehnsucht heißt das alte Lied der Taiga Die Lieder der sowjetischen Emigranten Autor: Armin Siebert Redaktion: SWR2 Tandem Sprecher: Karl-Rudolf Menke, Isabelle Demey Sendung: Freitag, 11.07.2014 um 19.20 Uhr in SWR2 Bitte beachten Sie: Das Manuskript ist ausschließlich zum persönlichen, privaten Gebrauch bestimmt. Jede weitere Vervielfältigung und Verbreitung bedarf der ausdrücklichen Genehmigung des Urhebers bzw. des SWR. SWR2 Tandem können Sie auch...»

«EMPLOYEE HANDBOOK Employee Handbook City and County of San Francisco Department of Human Resources City and County of San Francisco Mayor Edwin M. Lee Micki Callahan Human Resources Director January 2012 The Department of Human Resources One South Van Ness Avenue, 4th Floor San Francisco, California 94103 www.sfgov.org/dhr (415) 557-4800 Mission The Department of Human Resources recruits, engages, and develops the City’s workforce to meet the expectations and service needs of San Franciscans...»

«Evaluationsbericht zum Projekt «Solidarität ist lernbar» Eser Davolio & Eckmann, IES Genève Institut d’Etudes Sociales, HES-S2 Centre de recherche sociale 28, rue PrévostMartin case postale 1211 Genève 4 Evaluationsbericht zum Projekt «Solidarität ist lernbar» Evaluation im Auftrag der SFH AutorInnen Miryam Eser Davolio und Monique Eckmann in Zusammenarbeit mit Eveline Helfenfinger-Gutzwiller miryame@tin.it monique.eckmann@ies.unige.ch Evaluationsbericht zum Projekt «Solidarität...»

«Christian Meyer Sozialund Umweltstandards in der Warenproduktion: Wo bleibt die Ethik? Öffentlicher Druck auf Unternehmen durch Anti-Corporate-Campaigns Sozialund Umweltstandards in der Warenproduktion: Wo bleibt die Ethik? Öffentlicher Druck auf Unternehmen durch Anti-Corporate-Campaigns Inhalt Einleitung der Herausgeber Der Preis stimmt – aber für wen eigentlich? Problemfelder, Adressaten und Strategien der Clean Clothes Campaign Unterrichtsplanung: Kompetenzförderung für Konsumenten...»

«Jens Schöne Erosion der Macht Die Auflösung des Ministeriums für Staatssicherheit in Berlin Berlin 2014 4. Auflage Schriftenreihe des Berliner Landesbeauftragten für die Unterlagen des Staatssicherheitsdienstes der ehemaligen DDR Band 19 Copyright 2004 beim Berliner Landesbeauftragten für die Unterlagen des Staatssicherheitsdienstes der ehemaligen DDR 4., unveränderte Auflage, Berlin 2014 Alle Rechte vorbehalten, insbesondere der Übersetzung, der Vervielfältigung jeder Art, des...»

«Expedition ANT-XXIII/9 Wochenberichte 12. Februar 2007: Drake Passage 19. Februar 2007: Suche nach MABEL und Besuch der Neumayer-Station 23. Februar 2007: Ostwärts!2. März 2007: Internationales Polarjahr beginnt auf Polarstern 9. März 2007: LOBSTER-Wochen 16. März 2007: Aus dem Gedächtnis des Meeres 23. März 2007: Von Diopsid und Schiffsroutine 30. März 2007: Landpartien und Baggerstunden 8. April 2007: Zwischen Tafeleisbergen und Tafelberg liegt der IPY-Seamount Zusammenfassung Die...»

«SAS Global Forum 2009 Data Integration Paper 092-2009 For Base SAS® Users: Welcome to SAS® Data Integration! Jeff Stander, SAS Institute Inc., Lake Mary, Florida ABSTRACT Base SAS® offers a very powerful way to manage your data. This paper introduces using SAS® Data Integration Studio from a Base SAS programmer's perspective. We will examine what benefits SAS Data Integration Studio offers and how to easily start using SAS Data Integration Studio through the use of existing SAS code, the...»

«MAx PlAnCk InstItute for soCIAl AnthroPology WorkIng PAPers WorkIng PAPer no. �� André P Czeglédy. dIstInCtly AfrICAn ChrIstIAns: sItuAtIng hIs PeoPle ChrIstIAn ChurCh WIthIn soCIAl trAnsforMAtIon Halle / Saale 2007 ISSN 1615-4568 Max Planck Institute for Social Anthropology, PO Box 110351,  06017 Halle / Saale, Phone: +49 (0)345 2927- 0, Fax: +49 (0)345 2927- 402, http://www.eth.mpg.de, e-mail: workingpaper@eth.mpg.de Distinctly...»

«Finale Studienergebnisse Helmut Krcmar Volker Markl Thomas Hoeren Innovationspotenzialanalyse für die neuenTechnologien für das Verwalten und Analysieren von großen Datenmengen (Big Data Management) im Auftrag des BMWi Vers on o em er Innovationspotentialanalyse für die neuen Technologien für das Verwalten und Analysieren von großen Datenmengen (Big Data Management) Autorenkollektiv Volker Markl Alexander Löser Thomas Hoeren Helmut Krcmar Holmer Hemsen Michael Schermann Matthias Gottlieb...»

«WEITERE WISSENSCHAFTLICHE AKTIVITÄTEN Mag. Dr. Andrea Zorka Kinda-Berlakovich A) Vorträge und Präsentationen 1. (1998). Organisation der zweisprachigen Lesung Literaturlesung mit burgenland-kroatischen Autoren im Rahmen des Eröffnungsfestes des Universitätscampus der Universität Wien sowie einer Darbietung der burgenländisch-kroatischen Folkloregruppe Kolo Slavuj am 17.10.1998. Veranstaltungsort: Institut für Slawistik der Universität Wien, Veranstaltung war im Clubmagazin der...»





 
<<  HOME   |    CONTACTS
2016 www.book.dislib.info - Free e-library - Books, dissertations, abstract

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.