Value relevance of audit opinion

The sweep the corporate failure of large conglomerates around the world in early 2000 led the critiques to revisit the discussion of auditors’ due to care and accountability (Haron, et al., 2009; Herbohn, et al., 2007) and this heated forum brought the auditors to scrutiny of the public and regulators (Careya, et al., 2012; Fargher & Jiang, 2008). The noteworthy controversial debate was whether the auditors could be held responsible for not disclosing the financial distress or the financial misstatement of their client. In this campaign the regulative authority and the media have repeatedly condemned the auditors for not signalling the users of the financial statements regarding the impending corporate failure (Carey, et al., 2008).

There is a high dependence on auditors report, by the users of the financial statements for the decision making purpose of the company, as it is said to be an unbiased opinion on the true and fair view of the general purpose financial statements. Accordingly, a significant reliance is placed on the independence auditor’s report as the external users have no or limited access to private information held by the corporation. On this grounds, it has been argued by the researchers that the auditor’s report should flag the users of an imminent failure of the corporate (Herbohn, et al., 2007) by way of qualifying the audit opinion on the basis of highlighting the inability of the firm to continue as a going concern. However, some contradicts this notion and claims that a going concern opinion could itself triggers a bankruptcy and act as a self-fulfilling prophecy (Menon & Williams, 2010).

The judgment as to whether the auditor should qualify the audit report for going concern is one of the most controversial decisions an auditor has to make (Nogler & Jang, 2012). This has cause a dilemma for the auditors when issuing a qualification. The literature reveals that if a financially distressed corporate collapse subsequent to an unqualified opinion, the auditor is at a risk of being charged as guilt of nondisclosure of the fact (Kausar, et al., 2017). Therefore the auditor must be skeptic of the work he performs.

On the other hand there is a high tendency of not issuing a qualified opinion on going concern of a corporate even though there could be an apparent liquidity crisis within the firm (Haron, et al., 2009). The reason is that the modified audit opinion on the financial stability of the firm could hasten bankruptcy by making the alert on going concern and the alert itself could be a self-fulfilling prophecy (Nogler & Jang, 2012). This could reduce the likelihood of turning around a company which otherwise could have been. Financial assistance from the investors could turnaround a company inter alia. However, in the presence of a going concern qualification the investors will be deterred to finance given the risk of losing the investment.

-Lulisha-

References

Auditing and Assurance Standards Board, 2015. Auditing Standard ASA 570, Melbourne, Australia: Auditing and Assurance Standards Board.

AICD & AUASB, 2009. Going Concern issues in financial reporting: a guide for companies and directors, Sydney: Australian Institute of Company Directors and Auditing and Assurance Standards Board.

Amin, K., Krishnan, J. & Yang, J. S., 2014. Going Concern Opinion and Cost of Equity. AUDITING: A Journal of Practice & Theory, 33(4), pp. 1-39.

Australian Institute of Company Directors, 2009. Going Concern issues in financial reporting: a guide for companies and, Sydney, Australia: Australian Institute of Company Directors.

Australian Prudential Regulation Authority, 2016. ADI Points of Presence workbook, Sydney: Australian Prudential Regulation Authority.

Carey, P., Geiger, M. & O’Connell, B., 2008. Costs Associated With Going-Concern-Modified Audit Opinions: An Analysis of the Australian Audit Market. ABACUS, 44(1), pp. 61-81.

Firth, M., 1980. A note on the impact of audit qualifications on lending and credit decisions. Journal of Banking & Finance, 4(3), pp. 257-267.

Haron, H., Hartadi, B., Ansari, M. & Ismail, I., 2009. Factors Influencing Auditors' Going Concern Opinion. Asian Academy of Management Journal, 14(1), p. 1–19.

Herbohn, K., Ragunathan, V. & Garsden, R., 2007. The horse has bolted: revisiting the market reaction to going concern modifications of audit reports. Accounting and Finance, Volume 47, p. 473–493.

Kausar, A., Taffler, R. . J. & Tan, C., 2017. Legal Regimes and Investor Response to the Auditor’s Going-Concern Opinion. Journal of Accounting, Auditing & Finance, 32(1), p. 40–72.

LaSalle, R. & Anandarajan, A., 1997. Bank Loan Officers' Reactions to Audit Reports Issued to Entities with Litigation and Going Concern Uncertainties. Accounting Horizons, 11(2), pp. 33-40.

Menon, K. & Williams, D., 2010. Investor Reaction to Going Concern Audit Reports. The Accounting Review, 85(6), p. 2075–2105.

Nogler , G. & Jang, I., 2012. Auditor’s Going-Concern Modification Decision in the Post-Enron Era. The Journal of Corporate Accounting & Finance, pp. 35-60.

Pucheta, M. C., Marti´Nez , A. V. & Benau, M. A. G., 2004. Reactions of the Spanish Capital Market to Qualified Audit Reports. European Accounting Review, 13(4), p. 689–711.

Schaub, M., 2006. Investor reaction to regulated monopolies announcing going concern opinions: What explains contagion among electric services companies?. Review of Accounting and Finance, 5(4), pp. 393-409.