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

Liesbeth Bruynseels and Marleen Willekens

Accounting, Organizations and Society, 2012, vol. 37, issue 4, 223-241

Abstract: 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).

Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:aosoci:v:37:y:2012:i:4:p:223-241

DOI: 10.1016/j.aos.2012.03.001

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