Auditor Differentiation, Mitigating Management Actions and Audit Reporting Accuracy for distressed firms

W.R. Knechel, L. Bruynseels, M. Willekens

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

In this paper we examine whether there is auditor differentiation through industry specialization and audit methodology in judging the adequacy of mitigating management actions as implemented by financially distressed companies. Using a sample of U.S. companies from manufacturing industries (SIC 20-39) that went bankrupt between 1999-2002, we find evidence that specialist auditors are more likely to issue a going-concern opinion for soon-to-be bankrupt companies when management undertakes strategic turnaround initiatives, relative to non-specialist auditors. Interestingly, and counter to our expectations, we find that audit firms that use a business risk audit methodology are less likely to issue a going-concern opinion for a firm that subsequently goes bankrupt if the client has undertaken operating initiatives to mitigate financial distress. Finally, we also find very strong evidence that all auditors, irrespective of type, are less likely to issue a going-concern opinion for clients that subsequently go bankrupt when the client has plans to raise cash in the short term.

Original languageEnglish
Pages (from-to)1-20
Number of pages20
JournalAuditing-a Journal of Practice & Theory
Volume30
Issue number1
DOIs
Publication statusPublished - Feb 2011

Keywords

  • audit reporting
  • going-concern
  • management plans
  • audit methodology
  • auditor industry specialization
  • GOING-CONCERN OPINIONS
  • INDUSTRY SPECIALIZATION
  • BANKRUPT COMPANIES
  • FINANCIAL DISTRESS
  • FEES
  • QUALITY
  • MODELS
  • EXPERTISE
  • DECISIONS
  • KNOWLEDGE

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