Strategic Actions and Going-Concern Audit Opinions

Abstract

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