The Association Of Changes In Self-Regulated (Voluntary) Disclosures Of Business Strategy And The Going Concern Opinion
Authors: Theuri Peter M. 
Published: February 2016

<p class="MsoBodyTextIndent" style="text-align: justify; text-indent: 0in; margin: 0in 0.5in 0pt;"><span style="font-family: &quot;Times New Roman&quot;,&quot;serif&quot;; font-size: 10pt; mso-bidi-font-weight: bold; mso-bidi-font-style: italic;">While a majority of research has pointed to management&rsquo;s engagement in earnings management through accruals and choices in accounting methods, only recently have studies investigated similar practices through voluntary disclosures of firm performance and/or future business strategies disclosed by management as part of their annual reporting.<span style="mso-spacerun: yes;">&nbsp; </span>Since a firm&rsquo;s future survival comes into question when a firm receives a going concern audit opinion, the key question is whether the presence of such an opinion can be associated with changes in self-regulated disclosures of business strategy.<span style="mso-spacerun: yes;">&nbsp; </span>Considering such bad news in light of management&rsquo;s freedom to discuss their views of firm performance voluntarily offers a great opportunity for disclosure management.<span style="mso-spacerun: yes;">&nbsp; </span></span></p><p class="MsoBodyTextIndent" style="text-align: justify; text-indent: 0in; margin: 0in 0.5in 0pt;"><span style="font-family: &quot;Times New Roman&quot;,&quot;serif&quot;; font-size: 10pt; mso-bidi-font-weight: bold; mso-bidi-font-style: italic;">&nbsp;</span></p><p class="MsoBodyTextIndent" style="text-align: justify; text-indent: 0in; margin: 0in 0.5in 0pt;"><span style="font-family: &quot;Times New Roman&quot;,&quot;serif&quot;; font-size: 10pt; mso-bidi-font-weight: bold; mso-bidi-font-style: italic;">This study investigates the association between changes in self-regulated (voluntary) disclosures of firm performance through articulation of future business strategy and the presence of a going concern audit opinion.<span style="mso-spacerun: yes;">&nbsp; </span>An experimental sample of 55 firms receiving a first-time going concern opinion is compared to a sample of 55 control firms not receiving a going concern opinion.<span style="mso-spacerun: yes;">&nbsp; </span>Data for a period of four years after the first-time going concern opinion is received is analyzed to provide 220 firm years for each sample of the 55 firms.<span style="mso-spacerun: yes;">&nbsp; </span>A score representing self-regulated disclosures of business strategy (dependent variable) derived from content analysis performed on sections of the annual report is used.</span></p><p class="MsoBodyTextIndent" style="text-align: justify; text-indent: 0in; margin: 0in 0.5in 0pt;"><span style="font-family: &quot;Times New Roman&quot;,&quot;serif&quot;; font-size: 10pt; mso-bidi-font-weight: bold; mso-bidi-font-style: italic;">&nbsp;</span></p><p class="MsoBodyTextIndent" style="text-align: justify; text-indent: 0in; margin: 0in 0.5in 0pt;"><span style="font-family: &quot;Times New Roman&quot;,&quot;serif&quot;; font-size: 10pt; mso-bidi-font-weight: bold; mso-bidi-font-style: italic;">Results indicate that management begins to disclose more defender type of business strategies about two years prior to the year of the first-time going concern opinion.<span style="mso-spacerun: yes;">&nbsp; </span>It may be an indicator that auditors begin expressing concerns about the firm&rsquo;s ability to survive as far back as two years prior to their issuance of the first-time going concern opinion.<span style="mso-spacerun: yes;">&nbsp; </span>Overall results indicate a negative association between management&rsquo;s tendency to disclose prospector type strategies and the first-time receipt of a going concern opinion.</span></p>