The auditor’s going concern decision and Types I and II errors: The Coase Theorem, transaction costs, bargaining power and attempts to mislead

Barnes, Paul

doi:10.1016/j.jaccpubpol.2004.10.003

Cited by 31 publications

(29 citation statements)

References 46 publications

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“…(), increased competition in an audit market decreases (increases) the ‘relative bargaining power’ of auditors (clients). Barnes () demonstrates that in the case of going concern, when the bargaining power of an auditor is high, Type I error (overqualification, e.g., a greater propensity to give a qualified opinion even when it is actually not the case) is expected to occur. However, Type II error (underqualification) occurs when an auditor's bargaining power is low (also confirmed by McKeown, Mutchler & Hopwood, ; Hackenbrack & Nelson, ; Barnes & Renart, ).…”

Section: Hypothesis Developmentmentioning

confidence: 99%

“…An increase in audit market competition after liberalisation is likely to decrease (increase) the relative bargaining power of auditors (client firms) (Casterella et al ., ). Consequently, a change in relative bargaining power could affect the audit opinions issued by auditors (Barnes, ; Barnes & Renart, ). Consistent with the foregoing, the liberalisation of the audit market in Iran, which occurred in 2001, has resulted in intense competition.…”

Section: Introductionmentioning

confidence: 99%

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The Effects of Audit Market Liberalisation and Auditor Type on Audit Opinions: The Iranian Experience

MohammadRezaei

Mohd–Saleh

Jaffar

et al. 2015

International Journal of Auditing

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Audit services were provided exclusively by a state entity in Iran until late 2001, when the audit market was liberalised. The liberalisation of the audit market resulted in increased competition, as more private auditors became licensed to operate and provide audit services. The present study examines the effects of audit market liberalisation and auditor type (i.e., state and private auditors) on audit opinions. It is predicted that increased competition in the audit market may reduce the relative bargaining power of auditors, which can compromise auditors' independence when issuing audit opinions. The present study also investigates whether the process of issuing audit opinions is influenced by the government, thus resulting in a lower rate of modified audit opinions issued by state auditors compared to those issued by private auditors. Importantly, this study develops an explanation based upon a bargaining power view of auditor independence in issuing audit opinions and upon the limitations of the explanation for the circumstances in which auditor and owner interests are aligned in the case of government entities. The present study analyses the data of firms listed on the Tehran Stock Exchange between 1999 and 2010. The findings, after controlling for auditor choice, reveal that modified audit opinions have decreased following the liberalisation of the audit market in Iran, and compared to private auditors, state auditors have issued fewer modified audit opinions. The findings suggest that increased competition in the audit market is more likely to decrease the relative bargaining power of auditors and that there is a significant concern regarding audit opinions when both auditee and auditor are state-controlled entities.

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Section: Hypothesis Developmentmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

The Effects of Audit Market Liberalisation and Auditor Type on Audit Opinions: The Iranian Experience

MohammadRezaei

Mohd–Saleh

Jaffar

et al. 2015

International Journal of Auditing

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Section: The Accounting Going Concernmentioning

confidence: 99%

“…Barnes () recognised the importance of the auditor's opinion and the related biasness arising from either Type 1 error or Type 2 error. He further concluded that legal costs when introduced are expected to cause bias, the extent of which ‘depends upon the auditor's relative bargaining power’ (: 415). Evidence from Hong Kong by Lam and Mensah () suggests that the use of the auditor's disclaimer report in the going concern context tended ‘to signal [a] more extreme client firm financial distress’ (: 706–7).…”

Section: The Accounting Going Concernmentioning

confidence: 99%

Business Continuity in the Face of Fraud and Organisational Change

Margret

Hoque

2016

Australian Accounting Review

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We examine business continuity in the context of fraud and accounting for an organisation as a going concern. The issues addressed are timely and focus on two points. First, fraudulent activities in business are increasing worldwide with related costs reaching trillions of US dollars. Second, the conventional accounting concept of a going concern that typically signifies business continuity is arguably formed on a static view of business. As such, this view does not help mitigate opportunities for fraudulent statements of account. We contribute to the accounting literature by emphasising the dynamic nature of business and in doing so extend the discussion on Type 1 and Type 2 going concern errors. In that context we provide evidence of a possible Type 3 going concern error in an organisation's financial reporting. Drawing on an international fraud case involving an Indian company, Satyam, we illustrate the adaptive behaviour of resilient business organisations. The findings of our study show that even in the face of fraud dynamic, adaptive organisations can achieve business continuity.

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“…For example, Type II costs, which may be relatively small to the auditor (possibly even beneficial), may not be so to an investor who stands to lose from inferring the company is a going concern when it is not. This analysis is an extension of Zhang () and Barnes (), although the focus of the latter was on the incentive for management to mislead the auditor and/or investors.…”

mentioning

confidence: 99%

Auditor Independence and Auditor Bargaining Power: Some Spanish Evidence Concerning Audit Error in the Going Concern Decision

Barnes

Renart

2013

Int J Auditing

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It is well known that where an auditor's relative bargaining power is high, this may help its independence and prevent a Type II error (no qualification but corporate failure). It is less well known that this may also lead to a lack of independence in the form of over‐conservatism and an unjustified inclination by an auditor to qualify to protect its reputation leading to a Type I error (a qualification but no corporate failure). We therefore hypothesize that there is a positive relationship between the auditor's relative bargaining power and Type I errors (‘’) and a negative relationship between it and Type II errors (‘’). The empirical study supports but rejects . Taken together, these results suggest that Spanish auditors have a high propensity to qualify to protect their reputation, undeterred by pressure from client companies, in order to protect their reputation – ‘over‐conservatism’ as we have called it.

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The auditor’s going concern decision and Types I and II errors: The Coase Theorem, transaction costs, bargaining power and attempts to mislead

Cited by 31 publications

References 46 publications

The Effects of Audit Market Liberalisation and Auditor Type on Audit Opinions: The Iranian Experience

The Effects of Audit Market Liberalisation and Auditor Type on Audit Opinions: The Iranian Experience

Business Continuity in the Face of Fraud and Organisational Change

Auditor Independence and Auditor Bargaining Power: Some Spanish Evidence Concerning Audit Error in the Going Concern Decision

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