Analysis of the Impact of Bankruptcy Risk Estimation on Auditor Conservatism

Objective: Many accounting and auditing variables represent forecasts of future events. Accordingly, decision making under conditions of uncertainty is of fundamental importance in accounting and auditing studies. An important aspect of such studies is estimating the risk of corporate bankruptcy. Th...

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Autores principales:	Meysam Foroughi Abari, Darush Foroughi, Iraj Kazemi
Formato:	article
Lenguaje:	FA
Publicado:	Shahid Bahonar University of Kerman 2020
Materias:	audit risk auditor conservatism estimation risk of bankruptcy audit fee going concern opinion Accounting. Bookkeeping HF5601-5689
Acceso en línea:	https://doaj.org/article/0270bae4849149ee8272458fec79d807
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spelling	oai:doaj.org-article:0270bae4849149ee8272458fec79d8072021-11-04T19:56:22ZAnalysis of the Impact of Bankruptcy Risk Estimation on Auditor Conservatism2008-89142476-292X10.22103/jak.2020.15009.3129https://doaj.org/article/0270bae4849149ee8272458fec79d8072020-11-01T00:00:00Zhttps://jak.uk.ac.ir/article_2614_6712dc34dee01eeea20015ddd3375df8.pdfhttps://doaj.org/toc/2008-8914https://doaj.org/toc/2476-292XObjective: Many accounting and auditing variables represent forecasts of future events. Accordingly, decision making under conditions of uncertainty is of fundamental importance in accounting and auditing studies. An important aspect of such studies is estimating the risk of corporate bankruptcy. The estimated risk occurs because the probability of the customer going bankrupt is unknown and must be determined statistically. The bankruptcy risk is somehow different from the estimated risk. Some companies can have the same point estimates of bankruptcy while they do not have the same risk estimates. The level of risk estimation indicates the degree of inaccuracy in the point estimates of bankruptcy. We measure the risk estimate using the standard errors of point estimates of the bankruptcy because the risk estimate is the second-moment risk and measures the estimation precision and uncertainty around the point estimates of bankruptcy. In other words, we use the variance-covariance matrix to compute the standard errors of point estimates. In general, given the importance of bankruptcy and its consequences, our research aims to assess auditor's conservatism by measuring the risk estimates and analyzing their impacts on auditor behavior. Methods: In this study, we first obtained the point estimates of bankruptcy and their standard errors, and then we predicted bankruptcy by specific models over rolling windows over the past five years. Then, we estimated multiple regression and probit models using the data set of 110 companies listed in the Tehran Stock Exchange, TSE, from 2007 to 2017. The data set was collected using financial statements, audit reports on the financial statements, the official website of the TSE, and the official data from the Iranian Association of Certified Public Accountants. At last, we performed data analysis to test related research hypotheses. Results: According to the research findings, an increase in the estimated risk of bankruptcy leads to a positive effect on the issuance of going opinion and no effect on audit fees. Conclusion: The main idea of this study is reporting auditors are risk-averse. The estimated risk imposes incremental uncertainty on the risk-averse auditors and consequently, affects their behaviors. On the other hand, our findings suggest that auditors are more conservative when they face a greater risk. Auditors are cautious about their professional responsibility and social accountability related to the bankruptcy of their client firms. Auditors get more conservative along with the increase of the estimated risk.Meysam Foroughi AbariDarush ForoughiIraj KazemiShahid Bahonar University of Kermanarticleaudit riskauditor conservatismestimation risk of bankruptcyaudit feegoing concern opinionAccounting. BookkeepingHF5601-5689FAمجله دانش حسابداری, Vol 11, Iss 3, Pp 67-97 (2020)
institution	DOAJ
collection	DOAJ
language	FA
topic	audit risk auditor conservatism estimation risk of bankruptcy audit fee going concern opinion Accounting. Bookkeeping HF5601-5689
spellingShingle	audit risk auditor conservatism estimation risk of bankruptcy audit fee going concern opinion Accounting. Bookkeeping HF5601-5689 Meysam Foroughi Abari Darush Foroughi Iraj Kazemi Analysis of the Impact of Bankruptcy Risk Estimation on Auditor Conservatism
description	Objective: Many accounting and auditing variables represent forecasts of future events. Accordingly, decision making under conditions of uncertainty is of fundamental importance in accounting and auditing studies. An important aspect of such studies is estimating the risk of corporate bankruptcy. The estimated risk occurs because the probability of the customer going bankrupt is unknown and must be determined statistically. The bankruptcy risk is somehow different from the estimated risk. Some companies can have the same point estimates of bankruptcy while they do not have the same risk estimates. The level of risk estimation indicates the degree of inaccuracy in the point estimates of bankruptcy. We measure the risk estimate using the standard errors of point estimates of the bankruptcy because the risk estimate is the second-moment risk and measures the estimation precision and uncertainty around the point estimates of bankruptcy. In other words, we use the variance-covariance matrix to compute the standard errors of point estimates. In general, given the importance of bankruptcy and its consequences, our research aims to assess auditor's conservatism by measuring the risk estimates and analyzing their impacts on auditor behavior. Methods: In this study, we first obtained the point estimates of bankruptcy and their standard errors, and then we predicted bankruptcy by specific models over rolling windows over the past five years. Then, we estimated multiple regression and probit models using the data set of 110 companies listed in the Tehran Stock Exchange, TSE, from 2007 to 2017. The data set was collected using financial statements, audit reports on the financial statements, the official website of the TSE, and the official data from the Iranian Association of Certified Public Accountants. At last, we performed data analysis to test related research hypotheses. Results: According to the research findings, an increase in the estimated risk of bankruptcy leads to a positive effect on the issuance of going opinion and no effect on audit fees. Conclusion: The main idea of this study is reporting auditors are risk-averse. The estimated risk imposes incremental uncertainty on the risk-averse auditors and consequently, affects their behaviors. On the other hand, our findings suggest that auditors are more conservative when they face a greater risk. Auditors are cautious about their professional responsibility and social accountability related to the bankruptcy of their client firms. Auditors get more conservative along with the increase of the estimated risk.
format	article
author	Meysam Foroughi Abari Darush Foroughi Iraj Kazemi
author_facet	Meysam Foroughi Abari Darush Foroughi Iraj Kazemi
author_sort	Meysam Foroughi Abari
title	Analysis of the Impact of Bankruptcy Risk Estimation on Auditor Conservatism
title_short	Analysis of the Impact of Bankruptcy Risk Estimation on Auditor Conservatism
title_full	Analysis of the Impact of Bankruptcy Risk Estimation on Auditor Conservatism
title_fullStr	Analysis of the Impact of Bankruptcy Risk Estimation on Auditor Conservatism
title_full_unstemmed	Analysis of the Impact of Bankruptcy Risk Estimation on Auditor Conservatism
title_sort	analysis of the impact of bankruptcy risk estimation on auditor conservatism
publisher	Shahid Bahonar University of Kerman
publishDate	2020
url	https://doaj.org/article/0270bae4849149ee8272458fec79d807
work_keys_str_mv	AT meysamforoughiabari analysisoftheimpactofbankruptcyriskestimationonauditorconservatism AT darushforoughi analysisoftheimpactofbankruptcyriskestimationonauditorconservatism AT irajkazemi analysisoftheimpactofbankruptcyriskestimationonauditorconservatism
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Analysis of the Impact of Bankruptcy Risk Estimation on Auditor Conservatism

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