On the Relation between Insider Trading and Going Concern Opinions

Hallman, Nicholas; Imdieke, Andrew J.; Kim, Kyonghee; Pereira, Raynolde

doi:10.2308/ajpt-52592

Cited by 7 publications

(9 citation statements)

References 36 publications

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“…However, they do not examine the source of the information advantage or the role of the audit process. 9 Chen et al (2013) find that insider sales over the fiscal year are negatively associated with a going concern opinion and interpret this as evidence that these trades influence the conduct of the audit and its outcome (see also Hallman et al (2020)). By focusing on insider trading in a tight window around the audit report date, our analysis mitigates concerns about reverse causality raised by Chen et al (2013); insider trades in a short window around the audit report date cannot influence the conduct of the audit.…”

Section: Related Literature On Insider Tradingmentioning

confidence: 77%

Audit process, private information, and insider trading

et al. 2022

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While the shareholder benefits of audits are well documented, evidence on whether audits can facilitate opportunistic behavior by corporate insiders is scarce. In this paper, we examine whether the audit process facilitates one particular form of opportunism: informed trading by corporate insiders. We focus our analysis on insider trading around the audit report date. We find an increase in trading around the audit report date and that the increase is abnormally large for firms that subsequently report modified opinions. The abnormal increase in trading is concentrated among officers and non-audit committee independent directors, and most pronounced in first-time modified opinions and modified opinions in years where financial results are subsequently restated. These trades are highly opportunistic: they predict restatements, and as a consequence, we show they avoid significant losses. Collectively, our findings provide novel evidence that insiders appear to exploit private information about the audit process––a process ostensibly designed to protect shareholders––for opportunistic gain.

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Section: Related Literature On Insider Tradingmentioning

confidence: 77%

Audit process, private information, and insider trading

et al. 2022

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“…Additionally, Beneish and Vargus (2002) provided evidence that one year ahead of income, accruals are significantly lower when accompanied by abnormal insider selling and greater when accompanied by abnormal insider buying. Hallman et al (2020) and Arif et al (2022) investigated the association between insider trading and audit opinions. In particular, Hallman et al (2020) found that insider sales increased two to four years before the issuance of audit going-concern opinions but dropped significantly in the year of such opinion due to the early communication between auditors and their most important clients (i.e.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

“…Hallman et al (2020) and Arif et al (2022) investigated the association between insider trading and audit opinions. In particular, Hallman et al (2020) found that insider sales increased two to four years before the issuance of audit going-concern opinions but dropped significantly in the year of such opinion due to the early communication between auditors and their most important clients (i.e. insiders’ firms) regarding their audit opinions.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

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Does mandatory audit rotation affect insider trading? Evidence from China

Xiao

Xi²,

Meng³

2023

MAJ

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Purpose This study aims to investigate the impact of mandatory audit partner rotation (MAPR) on Chinese listed firms’ insider trading, as well as the moderating effects of firm characteristics on this impact. The economic mechanism behind this impact is also explored. Design/methodology/approach This study conducts a regression analysis on firms associated with mandatory and voluntary audit partner rotation based on 2009–2019 firm data and examines whether corporate insiders of these two types of firms increase their share sales within 12 months before their financial statements are submitted to a new rotated auditor. Findings Client firms’ corporate insiders increase their share sales within 12 months before their financial statements are submitted to a new mandatory rotated auditor. In addition, such an association is less pronounced for client firms that changed from Big 4 auditors to those with higher financial constraints. This is more pronounced for client firms with higher information asymmetry. The economic mechanism of the finding is that is the MAPR implementation reduces earnings management activities from client firms. Moreover, client firms’ buy-and-hold stock returns decline in the first year after MAPR. Research limitations/implications This study should assist investors, corporate shareholders and Chinese policymakers. Investors can be well protected through the adoption of MAPR because upcoming auditors enhance the audit quality of clients by restraining managers’ manipulation of reported earnings and declining firms’ insider trading afterwards. Investors, Chinese policymakers and corporate shareholders should pay more attention to firms’ financial report quality, auditor selection, financial situation, corporate governance and the information environment. Explicitly, firms with less transparent financial report quality, non-big 4 auditors and fewer financial constraints are more likely to be involved in insider trading. Originality/value To the best of the authors’ knowledge, none of the extant studies have examined the impact of MAPR on insider sales. This study extends the research on the effect of the audit process on firm market performance by investigating the impact of audit partner rotation policy on insider trading behaviors.

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“…In addition, we encourage the IAASB's ongoing collaboration with the IESBA and jurisdictional regulators regarding auditor independence. Although research reports mixed evidence on whether threats to independence (e.g., the provision of non-audit services, fee dependence, tenure) are associated with the propensity to report on going concern uncertainties (e.g., Blay and Geiger 2013;Hossain, Monroe, Wilson, and Jubb 2016;Wu, Hsu, and Haslam 2016;Hallman, Imdieke, Kim, and Pereira 2020), the consequences of reporting on going concern uncertainty for the client, shareholders, and the auditors themselves (see Geiger et al 2019) make auditor independence critical to audit quality in this area.…”

Section: (A) Should the Auditor Have Enhanced Or More Requirements With Regard To Going Concern In An Audit Of Financial Statements? If Ymentioning

confidence: 99%

Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the Discussion Paper:Fraud and Going Concern in an Audit of Financial Statements: Exploring the Differences between Public Perceptions about the Role of the Auditor and the Auditor's Responsibilities in a Financial Statement Audit

Schaefer¹,

Brown²,

Ege³

et al. 2021

Current Issues in Auditing

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We commend the International Auditing and Assurance Standards Board (the Board) on its efforts to determine “whether the auditing standards related to fraud and going concern need to be updated to reflect the rapidly evolving external reporting landscape.” We especially commend the Board on the timeliness of the call for input into these issues in that there is sufficient time to conduct research to further inform questions raised in the Discussion Paper and the questions that will inevitably arise as deliberations continue and progress is made on the project. We note below insights from the extant research literature as they relate to the questions posed in the Discussion Paper, but there remain many unanswered questions. We believe that many members of the Auditing Section of the American Accounting Association stand ready to work with the Board and other stakeholders to inform deliberations in this area.

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On the Relation between Insider Trading and Going Concern Opinions

Cited by 7 publications

References 36 publications

Audit process, private information, and insider trading

Audit process, private information, and insider trading

Does mandatory audit rotation affect insider trading? Evidence from China

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