The accuracy of auditor going concern opinion in predicting bankruptcy at different sectors companies


SAS no.59 have been issued in 1988, the hearer ‘s traveling concern study received much attending from the stakeholders such as legislators, the populace and research workers. SAS no 59 enhanced the hearer cautious, attending, and duty for traveling concern rating by necessitating the hearer to measure on significant uncertainty be about the client traveling concern ability.

However as clip goes by the current economic status and environment has made the important alteration in issue of the hearer traveling concern sentiment. The Institute of Chartered Accountants In England and Wales stated that “higher proportions of 2008 twelvemonth end one-year studies are likely to incorporate revelations associating to traveling concern and liquidating, together with an addition in the figure of modified audit studies as compared to old years” ( ICAEW, 2008, p.1 ) . The market reactions and the full market deductions of a rise in these revelations and modified audit sentiments will be affected by the degrees of apprehension and consciousness regarding of this likely rise.

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The demand of traveling concern sentiment is desperately required these yearss to heighten the degree of concern assurance. Based on ICAEW 2008 Q4, concern assurance proctor found that “UK concern assurance had fallen for a 6th back-to-back one-fourth to make the lowest degree since the proctor began” ( ICAEW, 2008, p.2 ) , hence the demands to unwrap that a material uncertainness exist, that will do determinations shapers misleads in foretelling the company ability to go on as traveling concern is desperately required. .

Meanwhile, even the hearer explain the ability of the continuity of the company concern, it does non intend guaranteed that the concern will go on until the day of the month of following fiscal statements. Academic involvement related to this subject has mostly focused on the procedure of the determination devising in the hearer traveling concern sentiment, while the issue of traveling concern describing truth has been the Centre of argument for stakeholders.

The increasing figure of bankruptcies happening the past decennary caused by the planetary economic status is become one of the most awful for the stakeholders, hence many stakeholder is truly rely on the hearer traveling concern sentiment as their counsel. Although the hearer is non responsible for foretelling bankruptcy and the issue of traveling concern sentiment is by no means a anticipation of bankruptcy, investors appear to anticipate the hearer to supply them with a warning of nearing fiscal failure. Because the consequence of the anterior surveies indicate that traveling concern sentiment are utile in foretelling bankruptcy and supply some explanatory power in foretelling bankruptcy declaration.

Research Problem and Aims

Hearer traveling concern study is going more of import these yearss. Because the study is explain about the ability of the company to go on their concern therefore the stakeholder can trust on that statement for their usher in making concern or taking some action. However, non all company published the hearer study to the populace.

This research is aimed to reply the undermentioned inquiries:

  1. Is there any relation about hearer traveling concern study and stakeholders involvements?
  2. How accurate is hearer traveling concern sentiment in foretelling bankruptcy ( US company, for period 2006-2008 )
  3. Is Management program act upon the audit traveling concern sentiment?
  4. What factors are act upon the increasing rate in issue the alterations of audit traveling concern study by the hearer?

Literature Review

Company ‘s information is really of import for stockholder in peculiar and stakeholder in whole. White ( 2003, p4 ) divided stakeholders ( i.e external users ) into three general groups, foremost are “Credit and Equity investors. Second are authorities ( executive and legislative subdivisions ) , regulative organic structures, and revenue enhancement governments. And last one is the general populace and particular involvement groups, labour brotherhoods, and consumer groups” .

As stakeholders involvements become more of import these yearss, hence direction programs and hearer traveling concern sentiment is demands to unwrap. Statement on Auditing Standards ( SAS ) No.59 ( AICPA 1988 ) requires that “auditors to asses the client ‘s ability to go on as traveling concern. If auditor believes there is significant uncertainty sing the client ‘s ability to go on as traveling concern, SAS No.59 requires hearers to asses direction ‘s programs and provides counsel as to what information to consider” ( AICPA, 1988 ) . However several independent pieces of research have been undertaken ( Mutchler, 1985 ; Chen and Church, 1992 ) bespeaking that “there has been extended research on factors that influence the issue of a traveling concern opinion” . Ellingsen et Al. ( 1989 ) said that “once an hearer has significant uncertainty about a company ‘s ability to go on as a traveling concern, the issue of traveling concern audit study depends upon an appraisal of direction ‘s plans” .

The importance of hearer traveling concern study for stakeholder involvement is really significant for presents. Previous surveies report that “going concern sentiments are utile in foretelling the bankruptcy” ( Hopwood et al. , 1989 ) , ( Hopwood et al. , 1994 ) and supply some explanatory power in foretelling bankruptcy declaration ( Kennedy and Shaw, 1991 ) . Prior survey Altman ( 1982, p7 ) suggest that “financial-statement users frequently perceive the issue of traveling concern sentiment as a anticipation of bankruptcy” . Anterior surveies ( Campbell and Mutchler, 1988 ) argued that “the issue of a traveling concern sentiment may increase investors ‘ appraisal of the house ‘s chance of fiscal failure” .

The high profile prostrations during the period 2000 to 2002 resulted in increased judicial proceeding against hearers, higher insurance costs, increased media examination, and increased regulative reappraisal of the scrutinizing profession. Over the old ages the scrutinizing profession has repeatedly been criticized for non supplying warning signals for impending client bankruptcy ( Raghunandan and Rama, 1995 ; Geiger and Raghunandan, 2002 ) . In response to these alterations in the audit environment during this period hearers would be expected to increase audit attempt ( Bedard and Johnstone, 2005 ) and professional incredulity ( Sercu et al. , 2006 ) . Prior research suggests that hearer ‘s determinations were more conservative after this period. Prior research suggested that “auditor can counterbalance for alterations in hazard exposure by changing their threshold for publishing modified audit reports” ( Francis and Krishnan 1999 ; Geiger and Raghunandan 2002 ; Geiger et al. , 2005 ) .

Sing the planetary economic crisis suffered during 2007, the truth of the hearer traveling concern sentiment in footings of foretelling bankruptcy is really of import. Prior research has shown that “the proportion of belly-up companies that received a traveling concern modified audit sentiment in the twelvemonth instantly predating bankruptcy is by and large lower than 50 percent” ( Chen and Church, 1992 ; Raghunandan and Rama, 1995 ; Geiger and Raghunandan, 2002 ) . In add-on, a survey by Nogler ( 1995 ) “following a sum of 157 houses the declaration of their traveling concern sentiment found that merely 33 per centum of the sample houses resolved their traveling concern sentiments by come ining into bankruptcy proceedings, whereas 35 per centum of the companies received an unqualified sentiment in the subsequent period and 32 per centum resolved their going-concern sentiment through disintegration, settlement and merger” . The high frequence of audit coverage mistakes is declarative of the fact that the hearer ‘s traveling concern determination is extremely complicated and involves a high degree of judgement. Prior research that investigated that “the causes of audit coverage mistakes focused on assortment of hearer and client related factors such as hearer size, hearer term of office, the chance of bankruptcy, payments and compact defaults, bankruptcy slowdown, industry sector etc” . ( McKeown et al. , 1991 ; Mutchler, Hopwood and Mckeown, 1997 ; Lennox 1999a and 1999b ) .


Hearer traveling concern coverage is rather a sensitive and extended subject. There is clip restraint where I need to finish this thesis in merely five months. All of these confines make me decided to make my research based on secondary informations. I will look into assorted secondary beginnings that is relevant to my research subject, such as text-books, cyberspace, company ‘s web sites, audit web ‘s web sites ( for illustration: PWC, Ernest & A ; immature and KPMG ) , some organisation ‘s, academic diaries, old studies or researches conduct by different writers that related in this subject, and other related paperss or studies. This research is focused in US, This research will carry on by utilizing “the bankruptcy anticipation model” ( Koh, 1991 ) , but for this research I will regenerate the informations such as Numberss of sample and clip periods. Basically the theoretical account was constructed with probit analysis utilizing WESML ( Weighted Exogenous Sample Maximum likeliness ) process on matched sample of insolvent and non belly-up houses. This process incorporates the sample and population proportions of insolvent and non belly-up houses in the theoretical account building procedure by burdening the log likeliness map. Secondary informations beginning such as the Moody ‘s industrial and OTC Manuals and 10-K studies will be needed to back up this analysis.




20th November 2009

Submiting thesis proposal

8th December 2008 – 10th January 2009

Collection of literature reappraisal

11th January 2010 – 11th February 2010

Data aggregation

12th February 2010 – 18th March 2010

Analysis informations

19th March 2010 – 23rd April 2010

Writing the thesis

24th April 2010 – 10th May 2010

Revision and redacting the thesis

11th May 2010

Submiting thesis


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Ellingsen, J.E. , Pany, K. and Fargan, P. , ( 1989 ) SAS No. 59: How to measure traveling concern, Journal of Accountancy,167 ( January ) , 51-57

Francis, J.R. and J. Krishnan. , ( 1999 ) Accounting accumulations and hearer coverage

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Hopwood, W. , McKeown, J. and Mutchler, J. , ( 1994 ) A redirect examination of hearer versus theoretical account truth within the context of the going-concem sentiment determination Contemporary Accounting Research 10 ( Spring ) , 409-432

Kennedy, D. and Shaw, W. , ( 1991 ) Measuring fiscal hurt declaration utilizing anterior audit sentiments, Contemporary Accounting Research 8 ( Fall ) , 97-114

Koh, H. , ( 1991 ) , Model Predictions and Auditor Assessments of Going Concern

Status, Accounting and Business Research, Vol. 21, No. 84, pp. 331-38

Lennox, C. , ( 1999a ) The Accuracy and Incremental Information Content of Audit Reportsin Predicting Bankruptcy, Journal of Business Finance and Accounting, 26 ( 5 ) , 757-778.125

Lennox, C. , ( 1999b ) Are big hearers more accurate than little hearers? , Accounting and Business Research, 29 ( 3 ) , 217-227

McKeown, J.C. , Mutchler, J.F. , and Hopwood, W. , ( 1991 ) Towards an account of hearer failure to modify the audit sentiment of belly-up companies, Auditing: A Journal of Practice and Theory, addendum, 1-13

Mutchler, J. , ( 1984 ) Auditor ‘s perceptual experience of the traveling concern sentiment, Auditing: A Journal of Practice & A ; Theory 5 ( Spring ) , 17-30

White, G. , Sondhi, A.C. & A ; Fried, D. , ( 2003 ) The Analysis and Use of Financial Statements, 3rd edition, John Wiley & A ; Sons, Inc. , ( London )

Raghunandan, K. and Rama, D.V. , ( 1995 ) Audit Reports for Companies in Financial Distress: Before and After SAS No. 59, Auditing: A Journal of Practice and Theory, 14 ( 1 ) , 50-64

The Institute of Chartered Accountants in England and Wales, ( 2008 ) Policy Briefing Traveling Concern, ( London )

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