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The effect of strategic and operating turnaround initiatives on audit reporting for distressed companies

Tijdschriftbijdrage - Tijdschriftartikel

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). © 2012 Elsevier Ltd.
Tijdschrift: Accounting, Organizations and Society
ISSN: 0361-3682
Issue: 4
Volume: 37
Pagina's: 223 - 241
Jaar van publicatie:2012
BOF-keylabel:ja
IOF-keylabel:ja
BOF-publication weight:1
CSS-citation score:1
Auteurs:International
Authors from:Higher Education
Toegankelijkheid:Closed