Do industry specialists and business risk auditors enhance audit reporting accuracy?.

A number of prior studies have examined audit reporting quality using size (Big 8/6/5/4) as a proxy for quality (i.e. Lennox, 1999b; Francis and Krishnan, 1999; Weber and Willenborg, 2003). In this paper we move beyond the traditional definition of a high quality auditor, and investigate whether enhanced industry knowledge or an increased focus on business risk auditing methodologies improve audit reporting accuracy. In addition, we examine whether industry specialists and business risk auditors have a comparative advantage in judging the adequacy of mitigating management actions implemented by financially distressed companies. Using a sample of US companies from manufacturing industries (SIC 20-39) that went bankrupt between 1998-2001, we do not find evidence supporting that specialist auditors are more likely to issue a going concern opinion for companies that subsequently go bankrupt. However, our evidence does indicate that specialists are not fooled by operating initiatives (whereas non-specialists are). Interestingly and counter to our expectations, we find that audit firms using a business risk methodology are less likely to issue a going–concern opinion for a firm that subsequently goes bankrupt. Further, our evidence also suggests that business risk auditors may be 'fooled' by short term operating efforts to reduce financial distress. Finally, we also find very strong evidence that auditors, irrespective of their type, are 'fooled' into not issuing a going concern opinion for clients that subsequently go bankrupt when the client is planning on raising cash in the short term.Behavior; Control; Cost; Exchange; Information; Negotiations; Performance; Power; Research; Theory; Law; Effects; Trade; Flows; Country; Intensity; Imports; Import; United States; Trade liberalization; Industry; Industries; Business; Risk; Reporting; Studies; Quality; Size; Knowledge; Auditing; Comparative advantage; Management; Companies; Manufacturing; Firms; Planning;

Client strategic actions, going-concern audit opinions and audit reporting errors.

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Hoe beoordelen accountants de continuïteit? Niet-financiële informatie voegt waarde toe

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Strategic Actions and Going-Concern Audit Opinions

In this paper we examine the association between various types of strategic management actions by distressed companies and the likelihood that they receive a going-concern audit opinion. Prior going-concern studies that focus on the impact of non-financial information investigate particular operating turnaround initiatives, such as cost reduction strategies (see, Behn et al., 2001; and Geiger and Rama, 2003). We contribute to this literature by studying the impact of a broader set of operating turnaround initiatives (i.e. cost reduction, asset disposal, increased marketing and product upgrading), as well as a set of strategic growth initiatives (i.e. product innovation, expansion and cooperative strategies). As the assessment of an auditee's likelihood of survival within the next twelve months is a critical in the going-concern decision making context, we further distinguish between strategic growth initiatives that are likely to generate positive cash flows in the short run (i.e. cooperative agreements) versus long run (i.e. innovation and expansion strategies). Based on manually collected data on a sample of 114 distressed manufacturing US firms, we find that operating turnaround initiatives, as well as strategic initiatives that are likely to generate positive cash flows in the long run are positively associated with the likelihood that a going-concern opinion is received. This evidence suggests that these two categories of management initiatives are perceived as additional going-concern risk factors by auditors. On the contrary, strategic turnaround initiatives that are likely to generate positive cash flows in the short run, are negatively associated with the likelihood that a going-concern opinion is received, which is supportive of this category of initiatives being perceived as mitigating factors.status: publishe

The effect of strategic and operating turnaround initiatives on audit reporting for distressed companies

Empirical research on the effect of turnaround initiatives on audit reporting is scant. This paper addresses this gap by examining audit reporting for distressed companies and its association with a broad array of strategic and operating turnaround initiatives. In particular, we study the association between business risk information and going-concern decisions for distressed clients. Using a sample of distressed firms in the US manufacturing industry, we find that both short-term cash flow potential as well as strategic growth and hence long-term cash flow potential are necessary for strategic turnaround initiatives to have a mitigating impact on the auditor's going-concern decision. Strategic turnaround initiatives for which only one of these two conditions holds and operating turnaround initiatives appear to function as going-concern risk factors as they are associated with a higher likelihood that a going-concern opinion will be issued. We also find that specialist and non-specialist auditors assess the mitigating potential of some but not all turnaround initiatives differently. Overall, our results suggest that auditors' strategic risk assessment (typically done in a business risk auditing context) is associated with the outcome of the audit process (the opinion). © 2012 Elsevier Ltd.status: publishe

If auditors are like Belgian beers, which style would you prefer?

Recent research by Francis, Pinnuck, and Watanabe (2014) has shown that financial reporting outcomes are influenced by the audit firm’s unique audit style. They argue that audit firm styles are driven by their “unique set of internal working rules that guide the auditor’s application of accounting and auditing standards” (Francis, Pinnuck & Watanabe, 2014). In our discussion, we zoom in on this study and call for further research on the factors that determine audit styles. Specifically, we emphasize the importance of extending this research from the audit firm level to the level of the audit office, audit team, and individual auditor. We conclude with the notion that intense collaboration between audit firms and academia is instrumental in opening the black box of audit styles to extend our knowledge on the root causes and drivers of audit quality

If auditors are like Belgian beers, which style would you prefer?

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