The Association Of Changes In Self-Regulated (Voluntary) Disclosures Of Business Strategy And The Going Concern Opinion

Abstract

While a majority of research has pointed to management’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.  Since a firm’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.  Considering such bad news in light of management’s freedom to discuss their views of firm performance voluntarily offers a great opportunity for disclosure management. 

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.  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.  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.  A score representing self-regulated disclosures of business strategy (dependent variable) derived from content analysis performed on sections of the annual report is used.

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.  It may be an indicator that auditors begin expressing concerns about the firm’s ability to survive as far back as two years prior to their issuance of the first-time going concern opinion.  Overall results indicate a negative association between management’s tendency to disclose prospector type strategies and the first-time receipt of a going concern opinion.