AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
CHAPTER 1: INTRODUCTION
1.0 Background of study
It is importance for an auditor able to reveal the financial statements’ user about
the substantial doubt of the client ability as a going concern. Usually the
decision as going concern opinion may exist when the companies meet the
factors of (1) inability to pay their obligation as they come due, (2) ability to
maintain the business operation after meet legislation or legal proceeding (3)
operating losses or working capital deficiencies is substantial, or (4) business
faces the internal problems even not related to money currency such as loss the
key personnel (Arens et al., 2008). Based on ISA 570 going concern are decision
by the auditor consider of possibility that the client may not be able to continue
its operations or meets its obligations for a reasonable period. The period is
estimated not to exceed 1 year from the date of the financial statements being
audited (Arens et al., 2008).
According to the ISA 700 the Auditor’s Report on Financial Statements makes it
mandatory for the auditor to modify the audit report by adding a paragraph to
highlight a material matter regarding a going concern problem. It is important
to adding an emphasis of matter paragraph in order to make a clear attention
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AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
about the note in the financial statements that discloses the matter relating to the
going concern review. It seem important when an auditor have substantial
doubt about the ability of client to remain going concern because it might reflect
on audit report either have to add explanatory paragraph to the unqualified
audit report, disclaim opinion or by issuing the qualified opinion if disclosure is
not adequate(Arens et al., 2008).
In Malaysia , just a small number of the distress companies review by their
auditor as the going concern review even there are many companies has failed
to meet their minimum capital or equity(not less than 25% of the paid) or has
the financially distress. Based on the article of Accountants Today (February
2007), Financial Statement Review Committee (FSRC) in Malaysia has notice
about the lack of disclosure in the company’s financial statement where this is
contrary to what was stated in the Financial Reporting Standard (FRS) 101.
Financial Reporting Standard (FRS) 101 highlighted the needed of presentation
of financial statement that should be clear, comprehensive and complete
explanation to the user about the company financial position. While in another
articles, Lessons from Deficient Disclosure, Accountants Today (November 2009)
stress up that most of the disclosure in the financial statement has to investigate
by the FSRC through query letter since that more detailed information on
certain matters disclosed (or not disclosed).
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AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
Carcello and Palmrose (1994) realize that the modified audit reports issued prior
to bankruptcy reduces both the occurrence and become aware of litigation if
bankruptcy subsequently occurs as these reports reduce investor surprise. The
going concern opinion decision is the whistleblower to the user of the financial
statement for the ability the business in continuing its operation. Once the
going concern opinions are issue it’s important to management of the business
to take action to overcome problems from avoiding the negative attention of
their business investor, creditors, suppliers or customers.
1.1 Problem Statement
There are many studies on predictors of going concern opinion. For instance is
the study by Haron et al. about the factors that infected auditor judgment on
going concern opinion. Intended for that judgment, auditor usually influence by
the three factors stated in the Auditing Standards: financial strength, the type of
audit evidence disclosed, and management effort when issuing a going concern
opinion. Furthermore, different paper by Barbadillo et al. (2003) discovered that
outcome in issuance of going-concern opinions are not only includes the
variables related to the company’s financial health, but also audit quality
attributes, auditor competence and independence. Boone, et al., (2010) indicates
the Big 4 firms to be expected in issuing the going concern opinion to distress
3
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
clients (significant relationship). Masyitoh and Adhariani (2010) has identify
that determinant of the going concern opinion decision effected by solvability
and auditor size.
Even thought there are a number of previous studies on factors that could
influence going concern opinion issuance, in the context of Malaysia there is still
one unanswered question. The question is on whether auditor specialization,
auditor switching and auditor remuneration can influence the auditor going
concern opinion decision.
1.2 Research Objectives
In response to the problem statement, the general intention of this study is to
assess the relationship between selected characteristics of auditor and the
issuance of going concern opinion decision.
Follows are the specific objectives:
1. To investigate whether auditor specialization has an effect on the
probability of the auditor to issue the going concern opinion.
2. To examine the effect of auditor switching on the probability of the
auditor to issue going concern opinion.
3. To analyze whether the level of auditor remunerations has an effect on
going concern opinion issuance.
4
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
1.2.1
Contribution of the study
The primary contribution of this paper is to provide evidence about the
influence of auditor specialization, auditor switching and auditor remuneration
on the auditor going concern opinion issuance. Thus, results of this paper
enhance our knowledge of the impact by the auditor characteristic either auditor
has the ability to modify the auditor’s report when the material uncertainty
exists related to measures and situation that solitary or in collective may classify
significant doubt on the entity’s ability to continue as a going concern. On the
other hand, this information is likely useful to policy makers in their
consideration on further quality of financial statements and reports that are
prepared by or are the responsibility of the auditor.
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AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
CHAPTER 2: LITERATURE REVIEW
2.1
The Gap in the Literature
Earlier studies on going concern opinion decision have examined the
consideration and factors on auditor’s judgment. Through the various on proxy
variables widen study that has been acknowledged, this chapter will lead into
related literature based on the problem statement in chapter 1. These studies are
summarized in Table 1.
Table 1: Literature Matrix
6
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
Table 1: Literature Matrix (continued)
7
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
Table 1: Literature Matrix (continued)
8
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
Table 1: Literature Matrix (continued)
9
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
Table 1: Literature Matrix (continued)
10
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
Table 1: Literature Matrix (continued)
11
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
Table 1: Literature Matrix (continued)
12
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
Based on the literature matrix above, there is a gap in the literature in the
context of Malaysia on whether auditor specialization, auditor switching and
auditor remuneration can influence the auditor going concern opinion decision.
2.2 Going Concern Opinion
Going concern is an assumption to continue its operating in the foreseeable
future by a company. So, an auditor should able to determine whether the
financial statement as prepared as a going concern unless the following:
a) Management’s company intends to liquidate the company,
b) The company will stop trading for some reason, and/or
c) Either auditors or its management believe that the firm will not survive in 1
year period.
According
to International
Standard on
Auditing (ISA)
auditor has
responsibilities to deal with the standard when conducting an audit on financial
statements.
ISA 570 stated that auditor has obligation relating with
management’s use of going concern doubt in the preparation of financial
statements (MIA, 2008). Regards to International accounting Standard (IAS) 1
13
require a specific assessment by the management to be made in association with
the ability to continue as a going concern. These include the capability of the
management to make a judgment on going concern doubt and the related
financial statements disclosed.
Therefore, auditor has to attain sufficient
accurate audit evidence whether there is material doubt conduct to going
concern assumption. Jiang, Rupley & Wu, 2010 has made argument in their
study about the weak internal control will lead to intentionally bias accruals
through aggressive management, thus increasing the risk that material
misstatement will not be detected(Jiang, Rupley, & Wu, 2010).
Study also
highlighted that largest bankruptcy in United States are due to the audit failure
because most of the firm did not receive the going concern opinion (Jiang et al.,
2010).
According to MIA,2008 in order to identify the ability on continue as going
concern, auditor require to do risk assessment and procedures, and related
activities; to look after either management have carry out the preliminary
assessment of the company’s ability to continue as a going concern. Then
auditor should to ensure if the assessment has been made by the management
whether management has plans to address them, however if the assessment are
not been performed yet, auditor should discuss the going concern assumption
14
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
since it may cast the considerable on ability of the entity to continue as a going
concern (MIA, 2008).
In view of the fact that auditor should obtain adequate of audit evidence verify
whether or not the material misstatement uncertainty through carry out
additional audit procedures, including consideration of mitigating factors (MIA,
2008). Previous study by Blay, Sneathan, & Kizirian (2007) has focus on audit
file data to investigate the relationship between the auditors' preliminary
assessments of the client's ability to continue (going-concern risk) and fraud risk
and the performance of the revenue cycle audit(Blay, Sneathen, & Kizirian,
2007).
Nevertheless the auditor has conclude the going concern assumption accurate in
the condition but the material misstatement uncertainly exist, auditor are
supposed to verify the financial statements as the following;
(a) Effectively explain the procedures or situation that may cast
significant doubt on the entity’s ability to continue as a going concern
and management’s plans to deal with these events or conditions; and
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AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
(b) Expose clearly that there is a material uncertainty related to events or
conditions that may cast significant doubt on the entity’s ability to
continue as a going concern and, therefore, that it may be unable to
realize its assets and discharge its liabilities in the normal course of
business (MIA, 2008).
A proper presentation of financial statement by the auditor with the issuance of
modified report by adding the paragraph to highlighted the going concern
assumption relating with existence of material uncertainty as to the client
capability continue on going concern estimated not to exceed more than 1 year
from the date of the financial statements being audited (Abbott, Parker, &
Peters, 2003). Abbott, Parker, & Peters (2003) also agreed that the decision to
modify the audit opinion of the financial shall concern a great deal of relevant
information and exercising professional judgment (Abbott et al., 2003).
2.3.1 Auditor Specialization
Study by Lowensohn, Johnson, Elder & Davies (2007) define specialization is
based on the training from the auditing in a particular industry. Knowledgeable
skills that gained because of the experience increase and will chances in
16
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
detecting the material misstatements in financial statements (Lowensohn,
Johnson, Elder, & Davies, 2007).
A number of study has been done on auditor specialization however the study
by Owhoso, & Weickgenannt (2007) investigates the extent to which auditors’
ratings of self-perceived abilities correspond with their actual performance, and
whether these perceptions are effected by audit experience and effectiveness
when conducting audits within their domain of specialization (Owhoso, &
Weickgenannt, 2007) .
Lowensohn, Johnson, Elder, & Davies (2007) explored the consequence of
auditor specialization on perceived audit quality and audit fees.
Results
indicates the relation between measures of audit firm special specialization and
audit quality and raise questions regarding audit firm size and audit quality. In
contrast to their study, they also suggest that engaging specialized auditors may
be good policy for many local governments (Lowensohn et al., 2007).
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AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
2.3.2 Auditor Switching
Accordance by Tu (2012), definition of auditor switching are replacement
because of the resignation or removal the accounting firm (not CPA) that audit
the company’s financial statements (Tu, 2012).
Chow and Rice (1982) have made a focus study about the argument on auditor
switching has been influenced by qualified opinion, and have a positive result
from their random sample. Other studies by Schwartz and Menon (1985) claim
that distress company may find the new auditor whose view the acceptable
reporting view by the management since they believe receiving the qualified
opinion just spoil the capability of the company to raise sufficient financing or
decrease the price of firm securities.
While Lin & Liu (2010) investigated the relationship between firms' internal
corporate governance mechanisms and their auditor switch decisions in the
Chinese context with identify two types of auditor switch, namely switching to
a larger auditor and switching to a smaller auditor (Lin & Liu, 2010). In contrast
to other previous study obtained significant differences in perceived levels of
satisfaction with their current independent auditor between executives who
18
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
have experienced a recent change in independent auditors and those not
experiencing a recent change (Daugherty & Tervo, 2008).
2.3.3 Auditor remuneration
Auditor remuneration is relies on the statutory audit of all work by the auditor
or the partner in the firm on its behalf in carried out the individual or group
accounts. Research studies have investigated with various issues relating with
the auditor remuneration.
Wang, Seawon & Zahid (2009) expected in their study that estimated description
on the development of industry specialization in a rapidly growing audit
market in China. Based in their finding specify that Big 4 auditors earns the fee
premiums for general brand name and industry specialization and also finds
that the auditor remuneration charged by the Big 4 industry specialist are 139%
higher in the more competitive statutory market.
Evidence on audit
remuneration in China are deem to be interesting because of the competition
among auditors is more pronounced in China due to active participation of
small- and mid-sized CPA firms and low concentration of Big 4 auditors (Wang,
Seawon, & Zahid, 2009)
19
Another research by Basioudis & Ellwood (2005) has extending the previous
study extending prior research on audit fees to develop a model for audit fees
and total auditor remuneration of National Health Service (NHS) in England
and Wales trusts. Later, study found that client size and complexity, as well as
client audit risk apply a positive effect on audit fees in the UK trust (Basioudis &
Ellwood, 2005)
CHAPTER 3: METHODOLOGY
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AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
3.1 Introduction
This chapter reveals the techniques to be used in order to achieve the research
objective of this study.
3.2 Research Question
This study seeks answers for the following research question:
Research Question 1: What is the effect of auditor specialization on the
issuance of the going concern opinion?
Research Question 2: What is the effect of auditor switching on the
possibility of the auditor to issue the going concern
opinion?
Research Question 3: Does the level of the auditor remuneration (audit
fee) has an effect on going concern opinion
issuance?
21
3.3 Data Collection
Data collection is organized assembling of information for a specific or
particular purpose that will used to as a basis for making conclusion.
3.3.1 Source of Data
There are two methods in gathering the source of data for a research which are
by using primary data or secondary data. In this study, secondary data has been
choosing as the source of data.
Secondary data are the information data
recorded and gathered by someone else prior to and for the purpose other than,
the current year. Secondary data method can be used because the annual report
needed could be gathered from the publicly available source such as annual
report that can be obtained from the Bursa Saham Malaysia website. There are
many advantages in using the secondary data which are the data gathered are
more inexpensive, faster, and easier to obtain the primary data (Zikmund, 2013)
3.3.2 Population and Sample Selection
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AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
Population can be definite as any compilation of persons or subjects having a
general perceive characteristic. So in this study, Malaysia listed companies in the
Bursa Saham Malaysia has been selected as the population that should be
21
covered.
Seeing as there are many natures of the industries includes
construction, consumer products, properties, hotel, plantation, trading and
services and so on, therefore two industries will be select to investigate the
selectee characteristic of the auditor.
While for the sample selection for this study is includes only the companies
whose level of financial distress encourages the issue on going concern status.
Research by Boone et. al (2012) has recognize that the auditor’s propensity to
issue a going concern audit report for distressed clients as a measure of audit
quality.
Criteria of companies that would be used as the sample of this study
are: (1) negative working capital and (2) negative cash flow from operating
activities.
3.4 Data Analysis
Logistic regression is a relationship model between a dependent to one or more
independent variables. This model will enable this study to predict at the
significance of the relationship (between independent and dependent variables
that has been modeling). Logistic regression can be binominal or multinomial to
observe the outcome situations for dependent variables. Binary regression will
23
be use in this study, to perceive the outcome situations of the; issuance of the
going concern opinion.
Probability outcome will use based on the following codes as per table:
In order to analyze relationship between the selectee characteristic and the
issuance of going concern opinion, this study will use the following logistic
regression model:
24
Where,
*NOTES
1)DV is abbreviation for dependent variables
2)IV is abbreviation for independent variables
3) CV is abbreviation for control variables
Consistent with prior
research by
Lowenhsin
et al. (2007), auditor
specialization(AUDITORSPEC), as a proxy for auditor capability, in order to
gained through practical experience on training from auditing in the particular
industry. Researches also claim that with the specialization, auditors are
possibility will distinguish the error in financial statements (Lowensohn,
Johnson, Elder, & Davies, 2007).
25
A variable auditor switching(AUDITORSWITCH) have been investigated in the
private and public sectors as a possible explanation of clients being able to
attract audit discounts from the incoming auditors (Basioudis & Ellwood, 2005).
Other research claims that firms switch auditors more frequently after receiving
qualified opinions, but do not be likely to afterward receive more unqualified
opinions (Chow and Rice, 1982). In other words, Schwartz and Menon (1985)
declare that failing firms have a greater trend to switch auditor than the
healthier firm. (Schwartz and Menon, 1985).
Variables auditor remuneration (AUDITORREMU) might positively relate to
audit quality but may put at risk audit independence. A satisfactory audit
procedure need both audit independence and audit quality. Currently scandals
demonstrate a need to ensure auditor independence and audit quality.
Variable size (CLIENTSIZE) is the size of the client (as measured by the log of
total assets). The estimated indication for this variable are larger client size will
probably to get the going concern opinion as their less probable to end up in
bankruptcy or as the financial distress company (Boone, Khurana, & Raman,
2010)
26
AUDITSIZE is the size determinant whether the audit work are done by Big 4
auditor or else. As the study by Boone et. al (2010) about the auditor’s tendency
to issue a going concern audit opinion for distressed companies is similar for Big
4 and Second-tier auditors.
27
CHAPTER 4: FINDINGS
4.0 Findings
This chapter will give details of results and findings from analysis the data
collection in deciding the relationship between the relationship between the
auditor specialization, auditor switching and auditor remuneration and the
issuance of going concern opinion decision. Study will use the descriptive
statistic and logistic regression to explain and explore the data with considered
the research question of this study.
4.1 Descriptive Analysis
On the whole, the total sample companies for two industries which are
construction and properties industries are consist of year 2011 and 2012. There
are 43 companies in year 2012 for construction companies but particularly only
20 companies were available for the sample. While for the year 2011 there are 44
companies but only 27 companies which are 26 percent from the total sample.
Shifting to the properties industry which are generally have a total sample of 84
companies for the year 2012 but only 27 companies are applicable as the sample
for our study, thus in year 2011 only 34% from the total 83 companies are
selected as sample.
28
The companies are not selected as the sample because of the various factor
which are the annual report for their prior year for our sample year are not
disclosed in the Bursa Malaysia and not met our criteria of companies that
would be used as the sample of this study which are: (1) negative working
capital and (2) negative cash flow from operating activities.
Table 2: Frequency of going concern issuance in year 2012 and 2011 for Construction
And Properties Sector
*
Notes:
1) Freq. is abbreviation for frequency
2) Cum. % is abbreviation for cumulative percentage
According to the table 2 going concern issuances for the construction and
properties industry categories into two years for a total 102 observation as
following;
I.
In overall, for the construction sector year 2012 we can see that
auditor issued going concern opinion to only up to 30% of
financially distressed companies. In other word around 70% of
29
financial distressed company has not received going concern
opinion even thought they maybe should get one. While for year
2011, auditor issued going concern opinion to only up to 29.63% of
financial distressed companies.
Therefore, around 70.37 of
financial distressed companies aren’t received the going concern
opinion.
II.
Whereas for the year 2012, only up to 14.81% had the issuance of
going concern opinion. Where for the year 2011 only up to 89.29%
for the distressed company has not received going concern
opinion.
III.
The presenting of sector Construction companies (59.63%) that get
going concern opinion is higher compared to percentage of
Properties companies (35.52%).
IV.
These results on (I) and (II) agreed with the statement on the
chapter 1 that only low percentage of companies have received
going concern opinion of financial distressed companies.
30
Table 3: Frequency for auditor specialization in year 2012 and 2011 for Construction
and Properties Industry.
*
Notes:
Freq. is abbreviation for frequency
2) Cum. % is abbreviation for cumulative percentage
I)
In detailed, table 3 shows that the issuances of going concern opinion
according to the auditor specialization as for construction and
properties industry up to 20% and 37.04% respectively for the year
2012.
II)
As for the year 2011, based on auditor specialization it’s only up to
29.63% and 28.57% respectively for construction and properties
industry had received the going concern opinion report.
31
Table 4: Frequency for auditor switching in year 2012 and 2011 for Construction and
Properties Industry.
*
Notes:
Freq. is abbreviation for frequency
2) Cum. % is abbreviation for cumulative percentage
According to the table 4 going concern issuances for the constructions and
properties industry categories into two years for total 102 observations as the
following:
I)
According to the auditor switched, only up to 20% and 7.41% had
receiving the going concern opinion for the year 2012.
II)
Next, for the year 2011 just only up to 18.52% and 28.57% of auditor
switching got the going concern opinion issuance
32
Table 5: Frequency for auditor size in year 2012 and 2011 for Construction and
Properties Industry.
*
Notes:
Freq. is abbreviation for frequency
2) Cum. % is abbreviation for cumulative percentage
From the table 5, study found for a total 102 observation as the following:
I)
For the observation on frequency of auditor size for construction
industry there are 40% and 37.04% had receiving the going concern
opinion issuance respectively for the year 2012 and 2011 .
II)
While for the properties industry up to 51.58% and 57.14%
respectively for the year 2011 and 2012 receiving the going opinion
issuance for the frequency of auditor size.
33
Table 6: Descriptive statistic on the auditor remuneration and clients size variables
in year 2012 and 2011 for Construction industry.
*NOTES
Std. Deviation is abbreviation for standard deviation
Based on the table 6 above mentions for a total 102 observation as the following
findings:
I)
Variables namely auditor remuneration have mean of RM186, 185.85
and RM202, 760.25 respectively. Thus in the same way for the
minimum range are RM27, 000.00 and RM22, 000.00. Moreover, for
the maximum range are RM618, 000 and RM625, 00.00 respectively.
II)
While for the client size variables have a mean of RM810, 764,167.22
and RM837, 244,745.45 respectively. Therefore, the standard
deviations for the year 2012 respectively of RM 1676514929.38 and
RM1347781215.33.
34
Table 7: Descriptive statistic on the auditor remuneration and clients size variables in
year
2012 and 2011 for Properties industry.
*NOTES
Std. Deviation is abbreviation for standard deviation
Turning to the results for the properties industry, descriptive statistics on table 7
results in 2011 and 2012 are as follows:
I)
Findings show that the standard deviation of auditor remuneration as
RM121, 806.00 and RM157, 669.95 respectively while has a mean of
RM194,539.96 and RM246, 279.37 for year 2011 and 2012.
II)
As the client size variables have a mean of RM874,315,839.93 and
RM1,236,000,022.00 while the standard deviation shows as
RM813,390,810.70 and RM1,859,122,872.00 respectively.
35
4.2 Logistic Regression
Logistic regression is used to quantify the findings since it appropriate to test
models in forecast the outcomes with two or more variables. This study will use
the following model:
Our study will used the output on Block 0 as the baseline later in comparing
between our results analysis without any three independent variables and two
control variables used in the model and with prediction variables included
(Block 1).
Table 8 : Omnibus Tests of Model Coefficients
Chi-square
Step 1
df
Sig.
Step
22.858
6
.001
Block
22.858
6
.001
Model
22.858
6
.001
The tables above were related with the model used in this study. The Table 8 is
referred as ‘goodness of fit’ test that refers as the overall indication of how well
the model performs.
36
Our result’s study in Block 1 indicates that the Sig. value is 0.001 which means it
is still as highly significant value (the Sig. value should be less than .05). While
the chi-square value shows in table Omnibus Tests of Model Coefficients is 22.86
with 6 degrees of freedom.
Table 9 : Model Summary
Step
-2 Log likelihood
1
80.866a
Cox & Snell R
Square
.201
Nagelkerke R Square
.315
Another results analysis that give a usefulness information for this study are
from the tables Model Summary which providing suggestion amount of
variation in the dependent variables used in the model . In our study findings,
the suggested value are between 0.201 and 0.315 of the variability is explained
by this set of variables respectively by Cox & Snell R Square and the Nagelkerke
R Square values. So between 20.1% and 31.5% of the variability is explained by
this set of variables.
37
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
Table 10 : Classification Tablea
Predicted
GC
Observed
Step 1
GC
0
1
Percentage Correct
0
80
1
98.8
1
17
4
19.0
Overall Percentage
82.4
a. The cut value is .500
Table 10 Classification Table indicates of how well model in study is able to
predict the correct (going concern opinion issuances) in our observations. If we
compared the results on percentage correct in the Block 0 and Block 1, there was
improvement in the model from 79.4 percent to 82.4 percent.
The table also explains that the going concern opinion issuances has been
accurately identified by the model is 19 percent of the distressed companies.
38
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
Table 11: Variables in the Equation
B
Step 1a
AUDITORSPEC
S.E.
Wald
df
Sig.
Exp(B)
-19.679
7.360E3
.000
1
.998
.000
AUDITPRSWITCH
.305
.714
.182
1
.670
1.356
AUDITORREMU
.000
.000
3.694
1
.055
1.000
CLIENTSIZE
.000
.000
1.535
1
.215
1.000
AUDITSIZE
-.574
.746
.592
1
.442
.563
INDUSTRY
-.960
.561
2.934
1
.087
.383
Constant
-.161
.902
.032
1
.858
.851
From table 11 study found result for the research question as the following
above:
RQ1 = auditor specialization is not significant in estimated the issuance of
going concern opinion report.
RQ2 = effect of auditor switching on the possibility of the auditor to
issue the going concern opinion indicates that changes of the
auditor in the companies had no significant.
RQ3 = results analyzed the level of the auditor remuneration (audit fee)
are significant on estimating the going concern opinion issuance
shows that there is significant value p= .055.
39
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
CHAPTER 5: CONCLUSION
5.1 Summary
In the chapter 1, study has found the issue in the context of Malaysia that there
is still one unanswered question on whether auditor specialization, auditor
switching and auditor remuneration can influence the auditor going concern
opinion decision.
General objectives of this study are to answer the relationship between selected
characteristics of auditor and the issuance of going concern opinion decision.
The specific objectives are:
Follow are the specific objectives:
1. To investigate whether auditor specialization has an effect on the
probability of the auditor to issue the going concern opinion.
2. To examine the effect of auditor switching on the probability of the
auditor to issue going concern opinion.
3. To analyze whether the level of auditor remunerations has an effect on
going concern opinion issuance.
This study seeking answers for the following research question:
Research Question 1: What is the effect of auditor specialization on the
issuance of the going concern opinion?
41
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
Research Question 2:What is the effect of auditor switching on the
possibility of the auditor to issue the going concern
opinion?
Research Question 3: Does the level of the auditor remuneration (audit
fee) has an effect on going concern opinion
issuance?
Study will use the Malaysia listed companies in the Bursa Saham Malaysia with
the criteria of companies as the sample of this study are: (1) negative working
capital and (2) negative cash flow from operating activities.
In order to analyze relationship between the selected characteristic and the
issuance of going concern opinion, the logistic regression equation is as follows:
This chapter discuss about the results of the data analysis. The data comprised
of year 2011 and 2012 from 102 companies selected of 2 sectors which are
constructions and properties.
The first step is to transform raw data into an interpretable form of descriptive
statistic. Basically the aims in conducted descriptive statistics as the preliminary
41
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
analysis are to enable study to observe the way in measuring the data in terms
of location.
Furthermore, it may also help in the interpretation of findings later. The final
step, in order to quantify the findings is through multiple regression analysis.
5.2 Conclusion
Based on the finding in Chapter 4, indicates that there is just one variables in
this study which is auditor remuneration that contribute significantly (p<0.10)
in estimating the issuance of going concern opinion.
According to the B weight from the output of logistic regression, the regression
equation is as follows:
GC = - 0.161 – 19.679 AUDITORSPEC + 0.305AUDITORSWITCH + 0.00
AUDITORREMU+0.00 CLIENTSIZE−0.574AUDITSIZE−0.960INDUSTRY
Answer for the research question for this study had been obtained by the
analysis’s results found. For the RQ1, finding shows that the auditor
specialization is not significant. The finding is consistent with the
42
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
results obtained by Barbadillo et al. (2003) that the auditor’s knowledge or
technical ability does not significantly affect the auditor’s decision.
Thus for the RQ2, the effect of auditor switching on the possibility of the auditor
to issue the going concern opinion indicates that changes of the auditor in the
companies had no significant affect on such opinion.
While for the RQ3, the results analyzed the level of the auditor remuneration
(audit fee) are significant on estimating the going concern opinion issuance
shows that there is significant value of p = .055. Furthermore, the level of
auditor remunerations might positively relate to audit quality that could risk
audit independence by the auditor. There are consistent with the research by
Basioudis & Ellwood (2005) that indicate that the magnitude of the audit fee
paid is positively and significantly (p= .018) related to receiving a going-concern
modified audit opinion.
43
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
5.3 Limitations
The sample size of this study are too small and not achieved the confidence level
regardless to the finding in this study might considerate as limitations to allow
the results of study conducted. Furthermore additional tests have to perform in
order to get more appropriate results to this study in order to examine the
auditor’s characteristics and going concern opinion issuances.
The time
constraint are also one of the limitations due to get more appropriate data to
achieved the research objective because there just one year time due to
submission of this study.
44
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
5.4 Suggestion for Future Research
Intentionally for the future research, study could attain other independent
variables that may possibly affect the issuance of going concern opinion as the
auditor tenure, liquidity of the company, and audit hours conducted.
Intended for future research, particular issues have to be taken serious from this
study conducted. The issues on time constrain and use adequate sample size to
achieve the research objectives. Next, determination on numbers of sample size
should be more than 102 observations and the duration in submitting the
research should cover longer time.
45
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
References
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financing on going concern reporting. Advances in Accounting, 20(0), 1-22.
Arens,A, A, Elder, R.,J, & Beasly, M, S, (Eds.). (2008). Auditing and services in
malaysia (5th ed.). Selangor: Prentice Hall.
Barbadillo, Gomez, Fuentes, & Benau. (2004). Audit quality and the
going-concern decision making process: Spanish evidence. European Accounting
Review, 13(4), 597-620.
Basioudis, I. G., Papakonstantinou, E., & Geiger, M. A. (2008). Audit fees,
Non‐Audit fees and auditor Going‐Concern reporting decisions in the united
kingdom. Abacus, 44(3), 284-309.
Basioudis, I. G., & Ellwood, S. (2005). External audit in the national health
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going-concern risk on auditors' assessments of the risk of material misstatement
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47
APPENDIX A
Logistic Regression
Classification Tablea,b
Predicted
GC
Observed
Step 0
GC
0
Percentage
Correct
1
0
81
0
100.0
1
21
0
.0
Overall Percentage
79.4
a. Constant is included in the model.
b. The cut value is .500
Variables in the Equation
Step 1a
B
S.E.
-19.679
7.360E3
.000
1
.998
.000
AUDITPRSWITCH
.305
.714
.182
1
.670
1.356
AUDITORREMU
.000
.000
3.694
1
.055
1.000
CLIENTSIZE
.000
.000
1.535
1
.215
1.000
AUDITSIZE
-.574
.746
.592
1
.442
.563
INDUSTRY
-.960
.561
2.934
1
.087
.383
Constant
-.161
.902
.032
1
.858
.851
AUDITORSPEC
Wald
df
Sig.
Exp(B)
a. Variable(s) entered on step 1: AUDITORSPEC, AUDITPRSWITCH, AUDITORREMU, CLIENTSIZE,
AUDITSIZE, INDUSTRY.
48
APPENDIX B : LIST OF THE COMPANIES AS A SAMPLE:NO
.
COMPANY NAME
INDUSTRY
1
BCB BERHAD
PROPERTIES
2
BOLTON BERHAD
PROPERTIES
3
DAMANSARA REALTY BHD
PROPERTIES
4
TROPICANA CORPORATION BERHAD/DIJAYA
CORPORATION BERHAD
PROPERTIES
5
FARLIM GROUP (MALAYSIA) BHD
PROPERTIES
6
GUOCOLAND (MALAYSIA) BERHAD
PROPERTIES
7
IBRACO BERHAD
PROPERTIES
8
IVORY PROPERTIES GROUP BERHAD
PROPERTIES
9
KEN HOLDINGS BERHAD
PROPERTIES
10
KARAMBUNAI CORP BHD
PROPERTIES
11
LIEN HOE CORPORATION BERHAD
PROPERTIES
12
MAGNA PRIMA BERHAD
PROPERTIES
13
MALAYSIA PACIFIC CORPORATION BERHAD
PROPERTIES
14
NADAYU PROPERTIES BERHAD
PROPERTIES
15
NAIM HOLDINGS BERHAD
PROPERTIES
16
PASDEC HOLDINGS BERHAD
PROPERTIES
17
PJ DEVELOPMENT HOLDINGS BERHAD
PROPERTIES
18
PERDUREN (M) BERHAD
PROPERTIES
19
PAN MALAYSIAN INDUSTRIES BERHAD
PROPERTIES
20
SOUTH MALAYSIA INDUSTRIES BERHAD
PROPERTIES
21
SAPURA RESOURCES BERHAD
PROPERTIES
50
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
22
TEBRAU TEGUH BERHAD
PROPERTIES
23
TRINITY CORPORATION BERHAD
PROPERTIES
24
UEM LAND HOLDINGS BERHAD
PROPERTIES
25
WING TAI MALAYSIA BERHAD
PROPERTIES
26
YNH PROPERTY BERHAD
PROPERTIES
27
YTL LAND &amp; DEVELOPMENT BERHAD
PROPERTIES
28
ASIAN PAC HOLDINGS BERHAD
PROPERTIES
29
BCB BERHAD
PROPERTIES
30
BOLTON BERHAD
PROPERTIES
31
COUNTRY VIEW BERHAD
PROPERTIES
32
DAMANSARA REALTY BHD
PROPERTIES
33
TROPICANA CORPORATION BERHAD/DIJAYA
CORPORATION BERHAD
PROPERTIES
34
EASTERN &amp; ORIENTAL BERHAD
PROPERTIES
51
LIST OF THE COMPANIES AS A SAMPLE (CONT.):NO
.
COMPANY NAME
INDUSTRY
35
EQUINE CAPITAL BERHAD
PROPERTIES
36
GROMUTUAL BERHAD
PROPERTIES
37
GRAND HOOVER BERHAD
PROPERTIES
38
GLOMAC BERHAD
PROPERTIES
39
I-BERHAD
PROPERTIES
40
KARAMBUNAI CORP BHD
PROPERTIES
41
LBS BINA GROUP BERHAD
PROPERTIES
42
MUI PROPERTIES BERHAD
PROPERTIES
43
MAH SING GROUP BERHAD
PROPERTIES
44
MAJUPERAK HOLDINGS BERHAD
PROPERTIES
45
MAGNA PRIMA BERHAD
PROPERTIES
46
MALAYSIA PACIFIC CORPORATION BERHAD
PROPERTIES
47
MALTON BERHAD
PROPERTIES
48
OSK PROPERTY HOLDINGS BERHAD
PROPERTIES
49
ORIENTAL INTEREST BERHAD
PROPERTIES
50
PERDUREN (M) BERHAD
PROPERTIES
51
PAN MALAYSIAN INDUSTRIES BERHAD
PROPERTIES
52
SOUTH MALAYSIA INDUSTRIES BERHAD
PROPERTIES
53
TAMBUN INDAH LAND BERHAD
PROPERTIES
54
TRINITY CORP BHD/TALAM CORP BHD
PROPERTIES
55
YNH PROPERTY BERHAD
PROPERTIES
56
ARK RESOURCES BERHAD
CONSTRUCTIO
N
BINA PURI HOLDINGS BHD
CONSTRUCTIO
N
57
52
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
BINA DARULAMAN BERHAD
CONSTRUCTIO
N
59
CREST BUILDER HOLDINGS BERHAD
CONSTRUCTIO
N
60
EKOVEST BERHAD
CONSTRUCTIO
N
61
FAJARBARU BUILDER GROUP BHD
CONSTRUCTIO
N
62
HO HUP CONSTRUCTION COMPANY BHD
CONSTRUCTIO
N
63
KUMPULAN JETSON BERHAD
CONSTRUCTIO
N
64
KIMLUN CORPORATION BERHAD
CONSTRUCTIO
N
65
KUMPULAN EUROPLUS BERHAD
CONSTRUCTIO
N
66
LEBTECH BERHAD
CONSTRUCTIO
N
67
MUHIBBAH ENGINEERING (M) BHD
CONSTRUCTIO
N
68
MALAYSIAN RESOURCES CORPORATION BERHAD
CONSTRUCTIO
N
69
MELATI EHSAN HOLDINGS BERHAD
CONSTRUCTIO
N
70
MTD ACPI ENGINEERING BERHAD
CONSTRUCTIO
N
58
53
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
53
LIST OF THE COMPANIES AS A SAMPLE:NO.
COMPANY NAME
INDUSTRY
PRINSIPTEK CORPORATION BERHAD
CONSTRUCTIO
N
TRC SYNERGY BERHAD
CONSTRUCTIO
N
TSR CAPITAL BERHAD
CONSTRUCTIO
N
TRIPLC BERHAD
CONSTRUCTIO
N
75
ZELAN BERHAD
CONSTRUCTIO
N
76
AHMAD ZAKI RESOURCES BERHAD
CONSTRUCTIO
N
ARK RESOURCES BERHAD
CONSTRUCTIO
N
78
BINA PURI HOLDINGS BHD
CONSTRUCTIO
N
79
BINA DARULAMAN BERHAD
CONSTRUCTIO
N
BINA GOODYEAR BERHAD
CONSTRUCTIO
N
81
CREST BUILDER HOLDINGS BERHAD
CONSTRUCTIO
N
82
DKLS INDUSTRIES BHD
CONSTRUCTIO
N
EKOVEST BERHAD
CONSTRUCTIO
N
FUTUTECH BERHAD
CONSTRUCTIO
N
71
72
73
74
77
80
83
84
54
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
GAMUDA BERHAD
CONSTRUCTIO
N
86
GADANG HOLDINGS BHD
CONSTRUCTIO
N
87
HO HUP CONSTRUCTION COMPANY BHD
CONSTRUCTIO
N
IREKA CORPORATION BERHAD
CONSTRUCTIO
N
89
JAKS RESOURCES BERHAD
CONSTRUCTIO
N
90
KUMPULAN JETSON BERHAD
CONSTRUCTIO
N
KIMLUN CORPORATION BERHAD
CONSTRUCTIO
N
92
LEBTECH BERHAD
CONSTRUCTIO
N
93
MALAYSIAN RESOURCES CORPORATION
BERHAD
CONSTRUCTIO
N
94
MERGE ENERGY BHD
CONSTRUCTIO
N
95
PESONA METRO HOLDINGS BHD /MITHRIL
BHD
CONSTRUCTIO
N
PRINSIPTEK CORPORATION BERHAD
CONSTRUCTIO
N
PLB ENGINEERING BERHAD
CONSTRUCTIO
N
SELOGA HOLDINGS BERHAD
CONSTRUCTIO
N
SPK-SENTOSA CORPORATION BERHAD
CONSTRUCTIO
N
85
88
91
96
97
98
99
55
AUDITOR CHARACTERISTICS AND GOING CONCERN OPINION ISSUANCE
TRC SYNERGY BERHAD
CONSTRUCTIO
N
101
TRIPLC BERHAD
CONSTRUCTIO
N
102
ZELAN BERHAD
CONSTRUCTIO
N
100
55