ابعاد کنترل روانشناختی والدین: ارتباطات با پرخاشگری فیزیکی و رابطه پیش دبستانی در روسیه

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).

Audit reporting of distressed companies is more relevant than ever as management and auditors face the consequences of the global financial crisis and economic downturn. In the midst of this economic turmoil, standard setters are considering revisions to the auditing standard on the auditor’s evaluation of a company’s ability to continue as a going concern (i.e. SAS No. 59). At the November 2011 Standing Advisory Group (SAG) Meeting,1 the PCAOB discussed the nature of conditions or events that should be considered in determining substantial doubt and whether the going-concern assessment should be limited to the ensuing fiscal year. This paper examines two issues related to the current debate about the time horizon and scope of information considered in going-concern decision-making: In particular, we ask: (1) do auditors take into account management plans and strategic actions to overcome financial difficulties, and (2) do auditors only assess short-term viability, or do they adopt a long-term view when making a going-concern decision. To that purpose we investigate whether and how a broad array of strategic and operating turnaround initiatives taken by management of financially distressed firms affect the auditor’s going-concern decision. In addition, we examine whether auditor industry specialization amplifies the extent to which auditors rely on strategic or operating turnaround initiatives in this context. We argue that their knowledge of industry best practices will allow specialist auditors to evaluate the adequacy and appropriateness of proposed management turnaround initiatives better, which in turn leads to an increased use of this type of information in going-concern decision-making. It is well documented in the literature that auditors make going-concern decisions based on reported financial results and compliance with financial obligations (e.g., Bell and Tabor, 1991, Chen and Church, 1992 and Mutchler, 1985). However, the importance of non-financial information is also emphasized in the auditing standards – besides negative financial trends or other indications of possible financial difficulties (for example, default on loan agreements), SAS No. 59 defines certain (non-financial) internal and external matters as conditions or events that may raise concerns about the entity’s ability to continue as a going-concern. As a result, SAS No. 59 requires auditors to also consider management plans to mitigate the effects of such adverse conditions or events when assessing a client’s ability to continue as a going-concern. The increased relevance of strategic considerations in the audit decision-making context is attributable in part to changes in auditing scope and methodology that took place in (a number of) large accounting firms in the second half of the 1990s (e.g., Bell et al., 1997, Bell et al., 2005, Curtis and Turley, 2007, Knechel, 2007, Peecher et al., 2007, Power, 2007 and Robson et al., 2007). Whereas traditional auditing approaches employ a bottom-up focus that directs attention to account balances, transaction classes, and properties of the client’s accounting system, business risk auditing takes a top-down perspective of the client’s business and industry, which entails analyzing the client’s strategic position. A general evolution towards business risk auditing is further reflected in some of the new International Audit Risk Standards, such as ISA 315. However, while the importance of the client’s business and strategy is recognized by auditing practitioners, research about the effect of strategic plans on the likelihood of going-concern opinions is scant.2 In this paper we address this gap by providing the first comprehensive study to our knowledge on the association between business risk information and going-concern decisions for distressed clients. In particular, we investigate the impact of a broad set of strategic and operating turnaround initiatives on an auditor’s going-concern decision and also examine whether this information is used more extensively (or differently) by industry specialists, compared to non-specialists. More specifically, drawing on a rich body of evidence from the strategy literature,3 we begin by defining a comprehensive set of turnaround initiatives. We initially distinguish between two types of management turnaround initiatives: operating turnaround initiatives such as cost-cutting and asset disposal that aim only at short-term improvement in financial performance, and strategic growth initiatives such as strategic alliances and acquisitions that aim at long-term improvement of financial performance. As going-concern decision-making involves the assessment of the likelihood of company survival within the next 12 months, an auditor is interested in the short-term financial impact of management turnaround initiatives. Therefore, we further sub-divide the strategic growth initiatives into two categories: strategic growth initiatives that have short-term positive cash flow potential beyond their long-term positive cash flow potential (such as cooperative agreements), and strategic growth initiatives that only have long-term positive cash flow potential (such as innovation and expansion strategies). Next, for each type of turnaround initiative that we consider, we follow the literature on successful company turnaround and test the association between the incidence of the initiative and the likelihood of receiving a going-concern opinion. We then test whether specialist and non-specialist auditors use information with respect to company turnaround initiatives to the same extent in light of a going-concern reporting decision. Like other going-concern studies using non-financial information, we rely on information disclosed in the management discussion and analysis (MD&A4) section of a firm’s 10-K, plus any related information provided in the remainder of the 10-K (Behn et al., 2001 and Geiger and Rama, 2003). We find that strategic growth initiatives that have short-term in addition to long-term positive cash flow potential are negatively associated with the likelihood that a going-concern opinion is issued. Thus, initiatives that belong to this class appear to be perceived by auditors as distress-mitigating. In contrast, strategic growth initiatives such as acquisitions that have long-term but not short-term positive cash flow potential are positively associated with the issuance of a going-concern opinion. Thus, initiatives of this type are perceived to be an additional going-concern risk factor. A similar result holds for cost reduction strategies which are operating turnaround initiatives that do not involve changes in the organization’s strategy. This implies that initiatives of this type also send a negative signal to the auditor about a distressed company’s viability. Finally, we find that specialist and non-specialist auditors assess operating turnaround initiatives differently in light of a going-concern decision. In particular, we find that specialist auditors are more inclined to issue a going-concern opinion when their client implements operating turnaround initiatives, whereas this does not hold for non-specialists. The remainder of this paper is organized as follows. In the next section we develop our hypotheses. Section 3 discusses the going-concern opinion model that is used in our analyses. Next, in Section 4 we provide an overview of our sample selection procedure and data collection approach. Section 5 presents our results. Finally, we conclude in Section 6.

In this study, we examine the effect of a broad range of distressed firms’ strategic and operating turnaround initiatives on the likelihood that an auditor issues a going-concern audit opinion. We further analyse whether the turnaround activities considered are regarded by auditors as distress-mitigating factors or as going-concern risk factors. Specifically, we investigate the impact of a comprehensive set of turnaround initiatives derived from the strategy literature on going-concern decision-making. We begin by classifying turnaround initiatives into strategic turnaround initiatives, which aim at long-term financial performance improvement, and operating initiatives, which aim at short-term financial performance improvement. We then distinguish between strategic initiatives that are expected to generate a positive cash flow effect within the next 12 months and strategic initiatives that are likely to have a positive performance effect only in the long run. This further sub-classification reflects the time horizon adopted by SAS No. 59, requiring an auditor to consider the going-concern status of a company for “one year beyond the data of the financial statements being audited” (AICPA, 1988). We find that the presence of strategic turnaround initiatives that are likely to generate positive cash flow effects in both the short run and the long run is negatively associated with the likelihood that a going-concern opinion is issued. In particular, we find that cooperative agreements provide positive signals about the going-concern status of the firm and therefore can be interpreted as a distress-mitigating factor. This result is consistent with evidence from the strategic literature that suggests interfirm cooperation is likely to have a positive impact on firm performance both in the short run and in the long run. In contrast, we find that strategic initiatives that are likely to generate positive cash flow effects only in the long run are positively associated with the likelihood that a going-concern opinion is issued. In particular, our evidence suggests that new mergers and acquisitions are not perceived as mitigating factors but rather as going-concern risk factors. A potential explanation for this finding is that mergers and acquisitions are not likely to improve the short-term financial performance of a firm (King et al., 2004). Further, successful mergers and acquisitions generally require a significant amount of financial slack (Hitt et al., 1998), which suggests that this might not be an appropriate turnaround initiative for a severely distressed firm. Furthermore, only particular operating turnaround initiatives are associated with a higher likelihood that a going-concern opinion is issued. More detailed analysis shows that cost reduction initiatives are perceived as additional going-concern risk factors, increasing the likelihood of a going-concern opinion. This finding is in line with the strategy literature, which documents that short-term fixes are often insufficient for firms with extremely poor performance to successfully turn around (Sudarsanam & Lai, 2001). Finally, we find that city-level industry specialists perceive the implementation of short-term operating initiatives as a going-concern risk factor, whereas non-specialists do not. Together with the finding that there is no difference between specialists and non-specialists in their use (and evaluation) of information regarding strategic turnaround initiatives, we find only partial confirmation for our expectation that industry specialists rely more on turnaround initiatives in their going-concern decision. Taken together, the results above on the relations between management turnaround initiatives and going-concern decisions suggest that auditors consider strategic information when making going-concern decisions, and that there is a relationship between auditors’ strategic risk assessment (typically done in a business risk auditing context) and the outcome of the audit (i.e., the opinion). Our results further indicate that auditors do not limit their evaluation of mitigating strategic actions to the management plans explicitly suggested in the audit standards. This could imply that the recent discussion about the scope of information to be considered and the time horizon probably will not lead to substantial departures from current audit practice. Furthermore, our evidence suggests that auditors are already adopting a long-term view when assessing client viability, which again suggests that the current discussion on expanding the time horizon for going-concern assessment would not affect current practice substantially. Our study is subject to several limitations and hence caution should be taken in drawing generalizations from this study. First, the sample size in this paper is kept rather small (n = 174) due to the labor-intensive manual collection of the strategic variables. Second, only companies from US manufacturing industries are included in the sample. Future research could replicate our study on a broader sample of companies in different industries and countries. Third, our data are from the pre-SOX era, and it is not clear whether our conclusions would continue to hold after Sarbanes Oxley. Future research could examine whether more recent events such as the global financial crisis, or SOX has affected the relationship between turnaround initiatives and going-concern reporting. Fourth, while we use the disclosure of strategic plans and information in firms’ annual report and 10-K as our proxy for clients’ strategic activity, clients may disclose strategic plans directly to the auditor without actually disclosing them in the 10-Ks. Furthermore, by using the content of the MD&A some plans and actions may not be included in the analysis. Fifth, the study implicitly assumes that the disclosure of various strategic and operating initiatives in the 10-K is equally likely. Furthermore, we do not have a measure of the feasibility of the publicly disclosed strategic plans considered in this paper. Finally, we also do not examine what happened to the distressed companies in our sample in the years after the audit opinion is issued. Future research could investigate whether the accuracy of auditors’ going-concern decisions is improved by consideration of strategic and operating management initiatives.