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    The effect of strategic and operating turnaround initiatives...
    research summary posted November 17, 2014 by Jennifer M Mueller-Phillips, tagged 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
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    Title:
    The effect of strategic and operating turnaround initiatives on audit reporting for distressed companies
    Practical Implications:

    Taken together, the results 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). The results further indicate that auditors do not limit their evaluation of mitigating strategic actions to the management plans explicitly suggested in the audit standards.

    For more information on this study, please contact Marleen Willekens.

    Citation:

    Bruynseels, L. and M. Willekens. 2012. The effect of strategic and operating turnaround initiatives on audit reporting for distressed companies. Accounting, Organizations and Society 37(4):223-241

    Keywords:
    audit reporting, business risk auditing, going-concern opinions, company turnaround initiatives, industry specialization
    Purpose of the Study:

    It is well documented in the literature that auditors make going-concern decisions based on reported financial results and compliance with financial obligations. However, research on the effect of turnaround initiatives on audit reporting is scant. This paper examines two issues related to the time horizon and scope of information considered in going-concern decision-making: (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 the authors 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, they examine whether auditor industry specialization amplifies the extent to which auditors rely on strategic or operating turnaround initiatives in this context. 

    Design/Method/ Approach:

    Using regression analysis, the authors estimate the effect of strategic and operating turnaround initiatives on auditors’ propensity to issue a going-concern modified opinion for a sample of distressed US listed companies in the years 1998-2001. Strategic initiatives include the introduction of new products, acquisitions and cooperative arrangements with other firms. The investigated operating initiatives include cost-cutting, asset disposal, product and process upgrading and increasing marketing efforts. 

    Findings:

    The findings show that:

    • Strategic turnaround initiatives that are likely to generate positive cash flow effects in both the short and long run (such as cooperative agreements with other firms) are negatively associated with the likelihood that a going-concern opinion is issued.
    • Strategic initiatives that are likely to generate positive cash flow effects only in the long run (such as mergers and acquisitions) are positively associated with the likelihood that a going-concern opinion is issued.
    • Certain operating turnaround initiatives (such as cost reduction efforts) are perceived by the auditor as additional going-concern risk factors, increasing the likelihood of a going-concern opinion.
    • City-level industry specialists perceive the implementation of short-term operating initiatives as a going-concern risk factor, whereas non-specialists do not. There is, however, no difference between specialists and non-specialists in their use (and evaluation) of information regarding strategic turnaround initiatives.
    Category:
    Accountants' Reporting
    Sub-category:
    Going Concern Decisions, Going Concern Decisions