Read Microsoft Word - Journal-Factors Audit Going Concern.doc text version

The Analysis of Determinants of Going Concern Audit Report

By Oni Currie Masyitoh Desi Adhariani SE.Ak, Msi (University of Indonesia) Address: Kampus Baru UI Depok, Indonesia Email address: [email protected], [email protected]

Abstract

Going concern is one of essential things for user to make a financial decision. This research is aim to explore factors that caused the issuance of going concern audit report by auditor. This research adds two new variables, audit size and audit committee, besides the other factors that cause auditor issue a going concern audit report. This research uses a Regression Logistic Analysis to determine the relationship of each variable (liquidity, solvability, profitability, cash flow, audit firm size, and audit committee) to going concern audit report. Different from previous researches, the results of this research show that liquidity, profitability, cash flow, and audit committee are not significant to influence the issuance of audit opinion. Audit size has a more significant relationship to audit opinion, while solvability is the most significant factor. Key words: Liquidity, Solvability, Profitability, Cash Flow, Audit Firm Size, Audit Committee, and Going Concern Audit Report.

1

1. Introduction Going concern is an extremely interesting issue to discuss. Investors, creditors and also government are extremely interested in identifying the financial position of the company, and one of factors brought to their consideration is the auditor's opinion. Opinion relevant to going concern is a red alert that financial failure in the company comes to exist. Upon the economic crisis at the end of the 90's, many companies firstly audited as unqualified are all of a sudden held as bankrupt on account of less detection over the financial performance of the company which as a matter of fact indicates unsound condition (Hani, Cleary, and Mukhlasin, 2003). On account of demand of qualified financial report deemed reasonable, many parties expect auditor as an independent party, in order to give a fair opinion on the financial report of the company, as a reference in decision making of the financial report user. Thus, auditor now must be cautious in putting forward an audit opinion taking account of any factors brought to your attention in producing a going concern audit opinion. Despite auditor is not responsible for predicting the bankruptcy, or the future event, but in the opinion of Church & Chen (1996) "going concern opinions are useful in predicting bankruptcy and provide some explanatory power in predicting bankruptcy resolution". While LaSalle and Anandarajan (1995) find out that company obtaining opinion of audit disclaimer is predisposed to have financial failure rather than company obtaining unqualified modified reports. Accordingly it is said that opinion produced by auditor is extremely beneficial to users of financial report, it is at least a preliminary reference in making analysis on a company. Therefore, this study as continuity of previous researches will discuss what factors influenced auditors on the issuance of going concern audit opinion especially in manufacturing company, by tested its relationship with financial ratios and two new variables, the audit committee and size of audit firm. Moreover, the financial ratios that I used in this study as an indicator are current ratio, net income before tax/net sales ratio, total debt to total equity ratio, cash flow to total debt ratio, which each of them are represent liquidity ratio, profitability ratio, solvability ratio, and cash flow ratio. In this study I used two kinds of analysis to find the relationship between audit opinion and variables. First, I used Univariate analysis to test if each variable individually has an effect to the issuance of going concern audit report, by using Mann-Whitney Test. As a result, each independent variable (liquidity ratio, profitability ratio, solvability ratio, cash flow ratio, and Audit Firm size), except audit committee, actually has an effect against the going concern audit opinion given by the auditor. Second, I used Multivariate analysis to analyze as an overall whether all the independent variables affect the going concern audit opinion. Different from previous research result, my results shows the variable that has very significant effect has been just company solvability factor which in this research is projected by Total Debt Ratio. Whereas, the other four variables, which previously have significant effect against the going concern audit opinion on the univariate analysis become not significant, because the company solvability level has a very high significance effect in affecting the audit opinion given by the auditor. The rest of this study proceeds as follows. In Section 2, I relate my study to prior literature and develop my hypothesis about it. Section 3 describes the sample selection

2

process and defines the variables used in this study. Then present my empirical results in Section 4, and give some conclusion in Section 5. 2. Previous Research & Hypothesis Development 2.1. Going Concern Audit Opinion and Financial Ratios In their research, Lenard, et.al (1998) state that when the auditor audits the financial condition of any company in the annual audit, the auditor must provide the audit report to be consolidated in the company financial statement. One of important things that must be solved is whether the company may survive or not (maintain its going concern). The modified audit report on the going concern indicates that in the auditor's evaluation, there is risk that the company may not survive in such business. From the auditor's point of view, such decision involves several analysis steps. The auditor must take into account the return of its operation, economic condition that affect the company, debt payment capability, and liquidity need in the future (Lenard, et. al., 1998). PSA No. 30 gives guideline for auditors in audit financial statement based on the auditing standard set out by the Indonesian Accountant Association (IAI), in case the auditor should evaluate whether there has been doubtfulness on the entity capability to maintain its going concern (viability), they should identify the information on the condition or certain events that indicate the presence of big doubt against the entity capability to maintain its going concern, such as negative trend; other clue on possible financial difficulty; internal problem; and external problem already occurred. Since going concern audit opinion is issued based on auditor's analysis about company's risk of bankruptcy, one way that auditor can used to analyze that possibility is by using financial ratios. Altman (1968) develops traditional approach over the ratio analysis to predict bankruptcy and uses multi-discriminant analysis technique, that identifies five ratios to predict the bankruptcy of any company, i.e. working capital to total assets, retained earning to total assets, earnings before interest and taxes to total assets, market value of equity to book value of total debt, and sales to total assets. Whereas, Mutchler (1984) finds six financial ratios which according to him are accurate for auditors as reference in giving opinion that refers to going concern problems faced by his audited client, i.e. net worth to total liabilities, cash flow from operation to total liabilities, current ratio, total liabilities to total assets, net income before tax to net sales, and long term debt to total assets. Financial ratio is very useful in predicting the failure and success rates of any company to maintain its going concern in the future, so that would become one of considerations for the auditor in giving the opinion. The liquidity ratio is used to measure the company capability to fulfill its short term obligation. One of indicators is reflected from its current ratio. The company where its current liabilities of the company have been higher than its current assets, and the company could not pay its short term obligation, may be the early signal that the company suffers from liquidity difficulty. Altman (1968) stated that the company which consistently suffers from operational losses infrequently has very small working capital than that of its total asset. According to Ang (1997), profitability is the company capability to generate profit from its operational activities. Net income before tax/net sales ratio that becomes measuring device in this research is employed to measure the company capability to

3

generate profit before tax for each of net sales. The Company suffering from losses for several years consecutively indicates that such company will likely fall into bankruptcy. The long term debt and solvency analysis evaluate the risk level faced by the company. High proportion of debt against equity fuels the company risks (White, Sondhi, and Fried, 1997:162). The measuring device, total debt to total equity ratio portrays on the capital structure owned by the company, so that it may be observed the risk level of not paying any debt. Total high debt to equity ratio indicates that the company will encounter danger of insolvency and will fall into bankruptcy (Altman, 1968). So does Chen and Church (1992) who review the capability of the variable of debt payment failure to explain the audit opinion, where its result indicates that in any failed companies, they more likely receive unmodified opinion one year before it is stated bankrupt, at time of such company has not yet failed. The importance of cash flow ratios in predicting the viability of any business for auditors, according to Mills and Yamamura (1999) is "to fully understand a company's viability as going concern, an auditor would well calculate a few simple ratio from data on client's cash flow statement." Cash flow to total debt, indicates the term required by the company to settle its debt. As expressed by Ross, Westerfield, and Jafee (2001), if the company has sufficient cash flow, then it may avoid the company from failure against its debt obligation and financial distress, that may influenced on giving an audit opinion. 2.2. Going Concern Audit Opinion and Committee Audit Based on research conducted by Salterio (2001) and Abbot (2004) on the relationship between the characteristics of the audit committee and indicators of quality in the financial statement, they support that the audit committee may play vital roles in improving the quality of the financial statement. Several other researches that support such statement are, among others, Wild (1996) shows that the informative ness of a firm's earnings reports increases after the information of an audit committee. Mc Mullen (1996) and Dechow, Sloan, and Sweeney (1996) both find evidence that firms committing financial fraud are less likely to have audit committees at the time of the fraud than are other firms. The existence of the audit committee in Indonesia is governed through the Circulars of Bapepam Number SE-03/PM/2002 (for public company) and Regulations of the Minister of State-Owned Corporation (BUMN) Number Per-05/MBU/2006 (for BUMN). It stated that one of the main functions of the audit committee is to maintain independency of the external auditor. The auditor independency has high effect against the audit quality, because it may minimize the possibility of external factors that possibly affect the auditor's decision (SEC 2000). In their research, Carcello and Neal (2000) find that "audit firms are less likely to issue going-concern reports to financially distressed clients whose audit committees lack independence." Such research also states a reversal relationship between the possibilities of issuing the opinion on the going concern by the auditor under percentage of total members of the audit committee who are affiliated with directors, such study also gives evidence on the relationship between a mechanism of corporate governance (composition of the audit committee) and the outcome of the audit opinion on the going concern.

4

2.3. Going Concern Audit Opinion and Audit Firm Size The size of the audit firm is often used as reference to the audit quality. As expressed by Lys and Watts (1994), "bigger audit firms have better financial resources and research facilities, superior technology and more talented employees to undertake large company audits than smaller audit firms. Their larger client portfolios enable them to resist management pressure whereas smaller firms provide more personalized services due to limited client portfolios and are expected to succumb to management's requirements." This is also verified by Deis Jr and Giroux (1992) that "two proxies of audit firm size are thought to affect audit quality: (1) the number of clients and (2) the percentage of audit fees depend on retaining any one client". Big audit firms tend to be more independent than those smaller audit firm, because the responsibility toward the public and they are also demanded to act professionally in giving the actual opinion. According to Lennox (1999), "large auditors are more likely to be sued (and criticized)," especially when two of these events have really occurred, namely (a)auditor's were criticized for not giving adequate warnings of bankruptcy, (b) auditor's were criticized following take over. Lennox also states that "large audit firms give more accurate signals, of traditional distress in their audit opinions". 2.4. Hypothesis Development This research is conducted to test factors that cause the issuance of going concern audit opinion, under hypotheses as follows: Hypothesis 1: Liquidity has effect on the going concern audit opinion. Hypothesis 2: Solvability has effect on the going concern audit opinion. Hypothesis 3: Profitability has effect on the going concern audit opinion. Hypothesis 4: Cash Flow has effect on the going concern audit opinion. Hypothesis 5: Audit committee has effect on the going concern audit opinion. Hypothesis 6: Size of Audit Firm has effect on going concern audit opinion Testing over hypotheses is conducted by univariate and multivariate analyses. The univariate analysis is taken to see the systematic difference between the going concern audit opinion (GCAR) and non-GCAR, by taking into account the data normality. The parametric hypothesis is taken based on the assumption that the population where the sample has been taken is normally distributed and the data are gathered at interval or ratio scale. Whereas, the non-parametric hypothesis is employed on not normally distributed data and gathered on nominal or ordinal scale (Sekaran, 2006). Therefore, in this research for testing of non-parametric hypothesis may be used Chi-square (2) test or MannWhitney test, whereas parametric hypothesis employs t-test. The multivariate analysis is taken by using the Regression Binary Logistic Test because the dependent variable employed in the testing has been of dichotomy or binary variable type, namely variables are evaluated based on two categories (yes/no). As expressed by Tarmizi (2003) that the logistic regression research model has superiority compared to linear probability model and probit model. Logistic model employs the maximum likelihood technique, namely a non-linear equation estimating technique in coefficient that has capability to compute big samples, because its value is consistent, not biased and generates minimum variants. The purpose of this data analysis is often to determine the most suitable model in illustrating the relation between discreet dependent variables and a cluster of independent variables. Therefore, by employing the multiple

5

logistic regression analysis, the research model on the hypothesis may be presented as follows: Logit Y = a + b1x1 + b2x2 + b3x3 + b4x4 + b5x5 + b6x6 + Where Y is audit opinion; bx1is current ratio; bx2 is total debt to total asset ratio; bx3 is net income before tax / net sales; bx4 is cash flow to total debt; bx5 is audit committee; bx6 is size of audit firm; a as a constant; and as an error. Testing analysis over hypothesis model above is taken by employing = 5%, as commonly practiced in social-based research. 3. Data and Variables Definition 3.1. Sample Selection The population of this research had been companies in manufacture industrial sector registered at the Jakarta Stock Exchange (BEJ) in 2004-2005, recorded in the Indonesian Capital Market Directory in 2004 and 2005. The use of manufacture companies in this research was because of convenience factor in the calculation of the financial ratio. Sampling is done by probability method, because sample representation is very important to generalize wider population. Design of sampling employed is an unrestricted probability sampling design, where each population in this research has opportunity to be known and similar to be selected as subject. From the population of 150 companies, it has just taken samples of 114 companies, because of limitation in obtaining such data. So, in two years it had obtained sample of about 228 data, under process of obtaining sample annually was as in table 1. (Insert Table 1 about here) 3.2. Explanatory Variables Dependent variables in this research are the going concern audit opinion. The opinion on going concern meant in this research is all types of audit opinions that address on the going concern problem faced by the company, either the unqualified opinion with explanatory paragraph, disclaimer, and adverse opinion. These variables are measured qualitatively, by giving score of "1" for going concern audit report (GCAR) and "0" for non-going concern audit report (non-GCAR). Liquidity that is one of independent variables in this research is measured by employing the current ratio, to determine the liquidity level of the company in fulfilling all its short term obligations become due by using its current assets owned. According to research conducted by Hani, Cleary, and Mukhlasin (2003), it stated when companies that have been non-liquid could not meet its obligation; the audit opinion must release information on the going concern, because the company is going to be bankrupt. Profitability is the company capability to generate profit from its operational activities. The profitability ratio in this research is measured by employing net income before tax/net sales ratio, whereas to measure the company capability in generating profit before tax against each Rp/$1 is in its sales affected. The company solvability in this research is measured by employing total debt/total equity ratio. This ratio is used to give figure the capital structure owned by the company, whether the capital structure of the company, so that it may be observed the unpaid risk of the long term obligation of the company. As expressed by Ross, Westerfield, and Jafee (2001) too much debt could show the possibility of insolvency of the company to pay its debt and the financial distress.

6

Cash flow is one of important ratios for auditors to give a going concern audit opinion. In their research, Mills and Yamamura (1998) state that "to fully understand a company's viability as a going concern, an auditor would well to calculate a few simple ratio from data on client's cash flow statement." For such purpose, cash flow is measured by using cash flow to total debt ratio, to indicate the term required by the company to settle all it obligation, under assumption that all cash flows from operation activities are used to pay back all obligations of the company. Evaluation on the role of the audit committee in this study is taken by taking into account the characteristics and audit committee's report according to provisions issued through Circulars of Bapepam No. SE-03/PM/2002 (for public company), SE008/BEJ/12-2001 and Kep-134/BL/2006. The variable of audit committee is measured by giving dummy "1" code to company that has audit committee according to regulations of Bapepam, and dummy "0" code for the other. Size of Audit Firm is used as reference to the audit quality. The big-four audit firms have international reputation and standard audit procedure expected to possibly give an independent opinion, so that it may reduce the agency risk and cut down default risk.The big-four audit firm in this research are the audit firms in Indonesia that have affiliation with the big four audit firm abroad, which in 2004-2005 consisted of Haryanto Sahari & Rekan (Price Waterhouse Coopers); Prasetio, Sarwoko, & Sandjaja (Ernst&Young); Osman Ramli & Rekan (Deloitte-Thomatsu); Sidharta, Sidharta, & Widjaja (KPMG). Measurement of this variable is taken by giving dummy "1" code to Audit Firm included in the Big Four, and dummy "0" code for non-Big Four Audit Firm. 4. Empirical Results 4.1. Statistic Descriptive Analysis Object of research that comes to the attention of this paper is companies engaging in manufacture industry, registered at Jakarta Stock Exchange for the period 2004-2005. Testing is taken against 228 sample data of 114 manufacture companies as samples. Based on statistic descriptive Table 2, it may be observed that from 228 total samples tested, for current ratio under average score of 2.041049 it may be generally stated that the average manufacture companies registered at JSX in the period of 2004-2005 have sufficiently good liquidity level (> 1). Total debt ratio, has average score 0.663294, so it may be stated that solvability level of manufacture companies has been generally sufficiently good. For score in net profit margin ratio, average score is -0.018791, so it is observed that the profitability level of such companies has been generally low (negative) for the period of 2004-2005. Whereas for cash flow ratio, with average scores 0.160057, it may be stated that the average cash flow ratio of the companies has been not good. (Insert Table 2 about here). Statistic descriptive for the Audit Committee and Size of Audit Firm variables, may be illustrated as follows (Table 3), from 114 companies that become samples in this research, it is obtained same data for 2005 and 2004, and namely 98 or 85.96% companies have Audit Committees, whereas the rest 16 or 14.04% companies do not have audit committees. Majority manufacture companies have audit committees according to applicable provisions. And from 114 sample companies tested, for 2005 and 2004 successively have been 59 companies (51.75.37%) and 61 companies (53.51%), audited by the Big Four Audit Firms, whereas 55 companies (48.25%) and 53 companies

7

(46.49%) audited by the non-Big Four Audit Firms. It may be stated that more than half of companies registered at JSX for the period of 2004-2005, have been audited by the Big Four Audit Firm. (Insert Table 3 about here). 4.2. Normality Analysis Hypothesis testing over data of 228 manufacture companies for 2004-2005 period tested has been taken by using SPSS 13.0 program. Initial step of testing is by determining data normality level from each variable -independent variable. The normality testing is taken by using One-Sample Kolmogrov-Smirnov test (Table 4), indicates that all research independent variables above have not been normally distributed. Where, based on One-Sample Kolmogrov-Smirnov test with = 5%, the data could be stated to be normally distributed if the value of data significance is 5%, vice versa (Uyanto, 2006). As observed in the Table 4, the value of significance of each independent variable (Asymp. Sig. 2-tailed) is of 0.000 or less than 0.05. So, the data cannot be tested by using parametric test. So, the testing on relationship of each independent variable against dependent variable employs the non-parametric test. (Insert Table 4 about here). 4.3. Univariate Analysis The univariate analysis is used to observe the systematic difference between companies that get opinion on going concern (GCAR) and non-going concern (NGCAR). Because based on test result of data quality taken before states that the data have not been normally distributed, then the type of univariate testing employed in this research is the type of non-parametric hypothesis testing, by using Mann-Whitney Test for data under interval or ratio scale, and Chi-Square test for data under nominal scale. This next analysis is taken by using Mann-Whitney Test with = 5%. Based on Table 5 on testing result by using Mann-Whitney Test, it may be observed that Asymp. Sig. (2-tailed) value for variables of Current Ratio, Total Debt Ratio, Net Profit Margin, Cash Flow Ratio, indicate the score of 0.000, and for Size of Audit Firm indicates the score of 0.001 or sig score from the five variables is less than 0.05. So, it may be stated that there has been significant difference over levels of liquidity, solvability, profitability, cash flow, and size of Audit Firm from companies that get audit opinion on non-going concern (non-GCAR) with those that obtain going concern audit opinion (GCAR). Whereas, for Audit Committee variable it may be observed that Asymp Sig. (2-tailed) score is of 0.296 or higher than (> 0.05), so this means that there has been no significant difference between companies that have or do not have audit committee against the audit opinion issued by the auditor. (Insert Table 5 about here). 4.4. Multivariate Analysis Multivariate testing taken in this research using Regression Binary Logistic test, because dependent variables in this research are in nominal scale (dummy variable), whereas independent variables consist of ratio and nominal data. Logistic regression hypothesis testing does not require assumption of data normality. It is according to Ghozali (2001) that the assumption multivariate normal distribution cannot be fulfilled because the free variables are mixed between continuous (matrix) variables and categorical (non-matrix).

8

The initial step of hypothesis testing by using logistic regression must take into account the overall fit model over data, which in the SPSS 13.0 program is presented in Hosmer and Lemeshow Test table. By employing = 5%, the regression model is deemed fit with data if its significance value is > 5%, as shown in Table 6. Whereas, for multivariate testing, with = 5%, the alternative hypothesis will be approved if the significance value of each variable has been < 5%. (Insert Table 6 about here). Next is the result of hypothesis testing by using an approach of two different selected methods, to specify how the independent variables are put into the analysis. The use of these two methods is aimed at determining a more accurate prediction from various possibilities in the hypothesis testing.1 a. Enter method. Procedures to select variables, where all independent variables test are put into single step. The result of multivariate testing indicated at Table 7 on variables in the equation above may be spelt out as follows: (Insert Table 7 about here). Hypothesis 1: liquidity has no effect against going concern audit opinion. By observing the test value that Wald = 0.126 and p-value (sig) = 0.722 is higher than 0.05 for CR variable, then the hypothesis is approved. This means liquidity has no effect against the going concern audit opinion issued by the auditor. Hypothesis 2: Solvability has no effect against going concern audit opinion. Based on test value of Wald = 13.457 and p-value (sig) on Table 4.9 for TDR variable is of 0.000 or sig value has been far below 0.05, then the hypothesis is disapproved. This means solvability has effect against decision-making of the auditor in giving a going concern audit opinion. Hypothesis 3: Profitability has no effect against going concern audit opinion. Test value of uji Wald in Table 4.9 above for NPM variable is of 0.085, and p-value (sig) = 0.771, has been far above (0.05), and then the hypothesis is approved. It means profitability has no effect against the going concern audit opinion given by the auditor. Hypothesis 4: Cash flow has no effect against going concern audit opinion. Test value of Wald in Table 4.9 for CFR variable is of 0.481 under p-value (sig)= 0.488 or above 0.05, then the hypothesis is approved. This means the cash flow ration has no effect against decision-making of the auditor in giving a going concern audit opinion. Hypothesis 5: Audit committee has no effect against going concern audit opinion. Based on test value of Wald in table 4.9 for KA variable is of 0.216, under p-velue (sig) = 0.698 or sig value has been far above 0.05, and then the hypothesis is approved. It means the audit committee variable in the company has no effect against decision-making of the auditor in giving going concern audit opinion. And the last, Hypothesis 6 : Size of Audit Firm has no effect against going concern audit opinion. Test value of Wald observed in table 4.9 for Audit Firm variable is of 3.249 and p-value (sig) = 0.071 or a little bit above 0.05, then the hypothesis is approved. This means the size of Audit Firm has been less significant in its effect against the going concern audit opinion given by the auditor. b. Backward Elimination (Wald) Method. A method that makes selection against variable step by step, where the testing against such variables removed will be step by step from model taken based on probability of wald statistic value. In backward elimination model, the testing based on Hosmer and Lemeshow Test is taken on each step. Testing result in Table 8 indicates that in first, second, and third steps, Sig values generated are of 0.387, 0.405, and 0.246 (higher than ). Means the research model at

1

http://www.spss.com

9

the three steps have fitted the data. Whereas in fourth and fifth steps, the Table shows values of 0.014 and 0.004, so the fourth and fifth steps of research model have not fit with the data. It consistent with provisions in SPSS, that stepwise method may cause significance value of output to be more likely decreasing. However, the use of backward elimination method in this research is taken by showing relation significance of each independent variable in each step, namely when independent variables deemed not significant that affect dependent variables will be automatically eliminated by the research model system. (Insert Table 8 about here). The decision-making basis of approving the hypothesis by using = 5%, the alternative hypothesis will be approved if Sig value is < 0.05. By using backward elimination (wald) method as in Table 9, it may be observed that at the first step, when all independent variables are put into the model, Sig value of each variable less than 0.05 has been just TDR variable. That is also the case in second, third, and fourth steps. However, different from testing result using enter method, at the fifth step as observed in the Table, there are two variables where their Sig values are less than 0.05, i.e. TDR and Audit Firm variables under Sig values of 0.000 and 0.038. This means solvability and size of Audit Firm have effect against going concern audit opinion given by the auditor. (Insert Table 9 about here). 4.6. Comparison on Analysis Result Based on analysis result taken before, it may produced a comparison table as in Table 10, it may be stated that individually, each independent variable, except audit committee variable, actually has effect against the audit opinion going concern given by the auditor. However, if multivariate testing is taken, the variable that has very significant effect has been just company solvability factor which in this research is projected by Total Debt Ratio (TDR). Whereas, the other four variables, which previously have significant effect against the going concern audit opinion on the univariate analysis become not significant (has no effect), because the company solvability level has a very high significance effect in affecting the audit opinion given by the auditor. Whereas, for size of audit firm variable, it may be stated that the size of audit firm has sufficiently significant effect against going concern audit opinion given by the auditor. This means that the Big Four Audit Firm may give higher audit quality than those of the non-Big Four Audit Firm, so that it may have effect on type of audit opinion given. (Insert Table 10 about here) 5. Conclusion Based on analysis result and discussion described in previous chapters, it may be suggested several conclusions that Liquidity, Profitability, Operational cash flow, and the existence of audit committee of a company has no significant effect against the issuance of going concern audit opinion by the auditor. Whereas solvability has a significant effect and size of audit firm has sufficiently significant effect against the issuance of going concern audit opinion by the auditor. So, as expressed by Hani, Cleary and Mukhlasin (2003) that auditors may not make financial ratio as definite measuring-rod in giving audit opinion related to the problem of going concern, but the ratio may become aid kit in the measurement of company solvency in evaluating its viability.

10

References

Altman, E.l. "Financial Ratios Discriminant Analysis and the Prediction of Corporate Bankruptcy". Journal of Finance. (1968). Beaver, W.H. "Financial Ratios as Predictors of Failure." Journal of Accounting Research Vol 4. (1966). Campbell, J., & J. Mutchler. "The Expectations Gap and Going Concern Uncertainties". Accounting Horizons, 2 (March): 42-49.(1988). Carcello, J.V., D. Hermanson, & H.E. Huss. "The Effect of SAS No.59 : How Treatment of the Transition Period Influences Result." Auditing: A Journal of Practice and Theory (Spring): 14-23. (1997). Chen, Kevin. C. W. & Bryan K. Church. "Default on Debt Obligations and the Issuance of Going Concern Opinions." Auditing: A Journal of Practice and Theory 11 (Fall) : 30-49. (1992). Chen, Kevin. C. W. & Bryan K. Church. "Going Concern Opinions and the Market \'s Reaction to Bankruptcy Fillings." The Accounting Review. Vol. 71: 117-128. (1996). Deis Jr, Donald R & Giroux, Gary A. "Determinant of Audit Quality in the Public Sector." The Accounting Review Vol 67, No. 3. (1992). Felo, Andrew J., Srinivasan Khrisnamurthy, & Steven A. Solieri. "Audit Committee Characteristics and the Perceived Quality of Financial Reporting: An Empirical Analysis." Social Science Research Network. (2003). Hani, Cleary & Mukhlasin. "Going Concern and Audit opinion : A Study in Banking Company at BEJ." National Symposium on Accountancy VI: 1221-1233. (2003). Indonesian Accountant Association. Professional Standard of Public Accountant. Jakarta : Salemba Empat, 2001. LaSalle, R. Andall. E & Asokan Anandarajan. "Reporting Options in the Preference of Going Concern Uncertainties; An Empirical Analysis of Factor Associated with Auditor's Choice." The American Accounting Association. (1995) Lenard, M. J., Alam, P., & Madey G.R.. "Design and Validation of a Hybrid Information System." Journal of Management Information Systems, 14 (4) : 219-237. (1998) Lennox, Clive S. "Audit Quaility and Auditor Size: An Evaluation of Reputation and Deep Pockets Hypothesis." Journal of Business Finance & Accounting, 26. (1999).

11

Manao, Hekinus & Yogi Nursetyo Tri Nugroho. "An Audit Quality Comparison Between Large and Small CPA Firm in Indonesia in the Context of "Going Concern" Opinion: Evidence Based on Auditees Financial Ratios." Simposium Nasional Akuntansi V: 36-45 session 2/E. (2001). Mills, John R., & Jeanne H. Yamamura. "The Power of Cash Flow Ratio." Journal of Accounting. October. (1998). Mutchler, J.F. "Auditor's Perception of the Going Concern Opinion." Auditing: A Journal of Practice and Theory. 5 (Spring): 17-30. (1984). Sekaran, Uma. Research Methods for Business. 4th ed. Jakarta : Salemba Empat, 2006. Setiawati, Loh Wenny & Sukrisno Agoes. "Effect of Financial ratio and Bankruptcy Prediction Against Audit Opinion Given By Auditor." Jurnal Akuntansi Thn IX/01/Jan. (2005). Tarmizi, Nurlina. "Linear Probability Model, Probit & Logistic regression: Superiority and Weakness." Jurnal Kajian Ekonomi and Bisnis Vol 5, No.2 August. (2003). Uyanto, Stanislaus S. Guideline on Data Analysis with SPSS. Yogyakarta : Graha Ilmu, 2006. White, Gerald I., Sondhi, Ashwinpaul C., & Fried, Dov. The Analysis and use of Financial Statements. 2nd ed. New York : John Wiley & Sons, Inc.,1998.

Websites: http://www.google.com ; http://www.sec.gov/publication.html ;http://www.ssrn.com ; http://www.spss.com

Documents: Regulations of the Minister of State-Owned Corporation (BUMN) Number Per05/MBU/2006 Circulars of Bapepam Number SE-03/PM/2002 Circulars of BEJ Number SE-008/BEJ/12-2001

12

Table 1 Total Research Samples

Total manufacture companies registered at BEJ in the period of 2004/2005 Total companies in which its financial statement had been incomplete. Total companies in which its audit report had been incomplete Total research samples 150 companies (16) (20) 114 companies

Table 2 Statistic Descriptive Financial Ratio

N Current Ratio Total Debt Ratio Net Profit Margin Cash Flow Ratio Valid N (listwise) 228 228 228 228 228 Minimum .0287 .0978 -2.4233 -1.6531 Maximum 7.7462 4.3664 .5498 1.5425 Mean 2.041049 .663294 -.018791 .160057 Std. Deviation 1.6355377 .6034548 .3162573 .3389538

Table 3 Statistic Descriptive of Audit committee and Size of Audit Firm

2005 Total Companies that have Audit Committees Total Companies that do not have Audit Committees 98 16 114 Total companies audited by Big Four Audit Firm Total companies audited by non-Big Four Audit Firm 59 55 114 85.96% 14.04% 100.00% 51.75% 48.25% 100.00% 98 16 114 61 53 114 53.51% 46.49% 100.00% 2004 85.96% 14.04%

Table 4 One-Sample Kolmogorov-Smirnov Test

Total Debt Current Ratio N Normal Parameters(a,b) Most Extreme Diff Mean Std. Deviation Absolute Positive Negative Kolmogorov-Smirnov Z Asymp. Sig. (2-tailed) 228 2.041049 1.6355377 .176 .176 -.109 2.654 .000 Ratio 228 .663294 .6034548 .220 .220 -.174 3.315 .000 Net Profit Margin 228 -.018791 .3162573 .293 .209 -.293 4.419 .000 Cash Flow Ratio 228 .160057 .3389538 .164 .164 -.140 2.482 .000 Size of Audit Firm 228 .53 .500 .354 .327 -.354 5.351 .000 Audit committee 228 .86 .348 .516 .343 -.516 7.795 .000

a Distribution test is Normal. b Calculated from data.

13

Table 5 Statistic Test

Current Ratio Mann-Whitney U Wilcoxon W Z Asymp.Sig. (2-tailed 2354.500 4184.500 -6.123 .000 Total Ratio 2353.000 16549.000 -6.126 .000 Debt Net Margin 1998.000 3828.000 -6.936 .000 Profit Cash Flow Ratio 2856.000 4685.000 -4.982 .000 Audit Committee 4764.000 18960.000 -1.046 .296 3720.000 5550.000 -3.480 .001 Size of KAP

a. Grouping variable : audit opinion

Table 6 Classification Tablea,b

Observed Step One Audit Opinion GCAR Overall Percentage Non-GCAR

Predicted Percentage GCAR 0 0 Correct 100.0 .0 73.7

Audit Opinion Non-GCAR 168 60

a. b.

Constant is included in the model The cut value is .500.

Table 7

Variables in the Equation Step a 1 CR TDR NPM CFR KAP KA Constant B -.061 2.961 -.308 -.528 -.674 .216 -2.726 S.E. .170 .807 1.059 .761 .374 .557 .877 Wald .126 13.457 .085 .481 3.249 .151 9.660 df 1 1 1 1 1 1 1 Sig. .722 .000 .771 .488 .071 .698 .002 Exp(B) .941 19.315 .735 .590 .510 1.241 .065

a. Variable(s) entered on step 1: CR, TDR, NPM, CFR, KAP, KA.

Table 8

Hosmer and Lemeshow Test Step 1 2 3 4 5 Chi-square 8.488 8.296 10.273 19.207 22.512 df 8 8 8 8 8 Sig. .387 .405 .246 .014 .004

14

Table 9 Variables in the Equation

B Step 1(a) CR TDR NPM CFR KAP KA Constant Step 2(a) CR TDR CFR KAP KA Constant Step 3(a) TDR CFR KAP KA Constant Step 4(a) TDR CFR KAP Constant Step 5(a) TDR KAP Constant -.061 2.961 -.308 -.528 -.674 .216 -2.726 -.063 3.036 -.546 -.698 .229 -2.768 3.192 -.543 -.712 .236 -2.974 3.216 -.526 -.711 -2.785 3.340 -.747 S.E. .170 .807 1.059 .761 .374 .557 .877 .171 .771 .758 .365 .557 .870 .656 .745 .364 .556 .673 .652 .730 .364 .495 .642 .360 Wald .126 13.457 .085 .481 3.249 .151 9.660 .135 15.511 .518 3.654 .169 10.131 23.686 .531 3.825 .180 19.545 24.313 .518 3.820 31.659 27.030 4.291 df 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Sig. .722 .000 .771 .488 .071 .698 .002 .713 .000 .472 .056 .681 .001 .000 .466 .051 .671 .000 .000 .472 .051 .000 .000 .038 .000 Exp(B) .941 19.315 .735 .590 .510 1.241 .065 .939 20.821 .579 .498 1.258 .063 24.336 .581 .491 1.266 .051 24.922 .591 .491 .062 28.215 .474 .055

-2.898 .481 36.231 a Variable(s) entered on step 1: CR, TDR, NPM, CFR, KAP, KA.

Table 10 Comparison of Analysis Result

Univariate Analysis Liquidity Solvability Profitability Cash Flow Audit Committee Size of Audit Firm Significant effect Significant effect Significant effect Significant effect No effect Significant effect Multivariate Analysis Enter Method No effect Significant effect No effect No effect No effect No effect Backward Elimination (Wald) Method No effect Significant effect No effect No effect No effect Significant effect

15

Information

Microsoft Word - Journal-Factors Audit Going Concern.doc

15 pages

Report File (DMCA)

Our content is added by our users. We aim to remove reported files within 1 working day. Please use this link to notify us:

Report this file as copyright or inappropriate

685705


You might also be interested in

BETA
emami.pmd
HKSA 570 (Clarified) Going Concern