The Effect of Real Activities Manipulation on Going Concern Audit Opinions for Financially Distressed Companies
Xu, H., Dao, M. and Wu, J., 2018. The effect of real activities manipulation on going concern audit opinions for financially distressed companies. Review of Accounting and Finance, 17(4), pp.514-539.
Posted: 8 Aug 2018 Last revised: 16 Apr 2020
Date Written: July 19, 2016
Abstract
This study examines the effect of real activities manipulation (RAM) on auditors’ decision of issuing going concern opinions for financially distressed companies. It draws on the theory that auditors perceive RAM as a potential litigation risk and a signal of client firms using other earnings management mechanisms to meet earnings targets (Kim and Park, 2014; Commerford et al., 2014). We find that auditors are more likely to issue going concern opinions to financially distressed clients with aggressive RAM to avert future litigation risk.The findings suggest RAM affects the audit process and leads auditors to report more conservatively.
Keywords: real activities manipulation, going concern opinion, auditor reporting conservatism
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