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Evaluating financial distress resolution using prior audit opinions

Author

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  • DUANE B. KENNEDY
  • WAYNE H. SHAW

Abstract

. Prior studies have examined whether audit opinions have incremental explanatory power over financial statement data in predicting bankruptcy filings. However, recent regulatory pronouncements indicate that the auditor should attempt to predict impending financial distress (going†concern difficulties), not whether a firm will file for bankruptcy. This study compares the audit opinion to the resolution of a bankruptcy filing to determine whether prior claims of audit failures might be due to the auditor's focus on financial distress resolution rather than the act of filing for bankruptcy. We find that the audit opinion is a significant variable in a model explaining the resolution of a bankruptcy filing. However, the audit opinion did not predict resolution of bankruptcy proceedings with any greater accuracy than did a naive mechanical model. Résumé. Des chercheurs se sont déjà demandé si l'opinion des vérificateurs avait un pouvoir explicatif marginal par rapport aux données des états financiers dans la prédiction des dépôts de bilan. Or, les règlements récemment promulgués prévoient que les vérificateurs doivent tenter de prédire les difficultés financières imminentes (menaces à la permanence de l'entreprise), et non pas les dépôts de bilan. Les auteurs mettent en parallèle l'opinion du vérificateur et l'issue des dépôts de bilan afin de déterminer si les allégations formulées d'inaptitude des vérificateurs peuvent être attribuables à l'intérêt porté par le vérificateur à la résolution des difficultés financières de l'entreprise plutôt qu'à l'acte du dépôt de bilan. Les auteurs concluent que l'opinion du vérificateur est une variable importante dans un modèle explicatif de l'issue des dépôts de bilan, maís qu'elle ne permet pas de prédire l'issue du déroulement de la faillite avec davantage d'exactitude qu'un modèle mécanique simple.

Suggested Citation

  • Duane B. Kennedy & Wayne H. Shaw, 1991. "Evaluating financial distress resolution using prior audit opinions," Contemporary Accounting Research, John Wiley & Sons, vol. 8(1), pages 97-114, September.
    • Handle: RePEc:wly:coacre:v:8:y:1991:i:1:p:97-114
    DOI: 10.1111/j.1911-3846.1991.tb00837.x
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    References listed on IDEAS

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    1. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    2. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    3. Zmijewski, Me, 1984. "Methodological Issues Related To The Estimation Of Financial Distress Prediction Models," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 22, pages 59-82.
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    Cited by:

    1. Frank D. Hodge & Roger D. Martin & Jamie H. Pratt, 2006. "Audit Qualifications of Income†Decreasing Accounting Choices," Contemporary Accounting Research, John Wiley & Sons, vol. 23(2), pages 369-394, June.
    2. Butler, Marty & Leone, Andrew J. & Willenborg, Michael, 2004. "An empirical analysis of auditor reporting and its association with abnormal accruals," Journal of Accounting and Economics, Elsevier, vol. 37(2), pages 139-165, June.
    3. Michael S. Long & Stephan E. Sefcik, 2002. "Closely Held Firms As Going Concerns," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 7(1), pages 37-50, Spring.
    4. Erkki Laitinen, 2011. "Assessing viability of Finnish reorganization and bankruptcy firms," European Journal of Law and Economics, Springer, vol. 31(2), pages 167-198, April.
    5. Agustín J. Sánchez-Medina & Félix Blázquez-Santana & Daniel L. Cerviño-Cortínez & Mónica Pellejero, 2025. "Ensemble Methods for Bankruptcy Resolution Prediction: A New Approach," Computational Economics, Springer;Society for Computational Economics, vol. 66(5), pages 3891-3926, November.
    6. Willenborg, Michael & McKeown, J.C.James C., 2000. "Going-concern initial public offerings," Journal of Accounting and Economics, Elsevier, vol. 30(3), pages 279-313, December.
    7. Abd Halim Ahmad & Nur Adiana Hiau Abdullah & Kamarun Nisham Taufil Mohd, 2016. "Market reactions to financial distress announcements: Does the market react differently to different outcomes?," Economics Bulletin, AccessEcon, vol. 36(2), pages 601-608.
    8. Fernandez, Ana I. & Gonzalez, Francisco, 2005. "How accounting and auditing systems can counteract risk-shifting of safety-nets in banking: Some international evidence," Journal of Financial Stability, Elsevier, vol. 1(4), pages 466-500, October.
    9. Wei Ting & Sin‐Hui Yen & Chien‐Liang Chiu, 2008. "The Influence of Qualified Foreign Institutional Investors on the Association between Default Risk and Audit Opinions: Evidence from the Chinese Stock Market," Corporate Governance: An International Review, Wiley Blackwell, vol. 16(5), pages 400-415, September.

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