Business Studies

Business Studies

Join as an Editor/Reviewer

Insolvency and the Role of Auditors

Volume: 62  ,  Issue: 1 , October    Published Date: 08 November 2020
Publisher Name: IJRP
Views: 53  ,  Download: 16
DOI: 10.47119/IJRP1006211020201475


# Author Name
1 Owolabi, Sunday, A,
2 Uhuaba, Okezie


Globally, the understanding of the role of auditors has been a complex phenomenon especially the contents and interpretation of financial statements. The perceived role of auditors in protecting clients' interest against fraud, insolvency, and other matters of great concern to the shareholders and other interest groups has been a sensitive discussion that has generated strong debates in the literature. In contributing to this issue and extending the frontiers in this regard, this study examined insolvency and the role of auditors. To achieve the objective of this study, an exploratory research design was adopted, as some journals, periodicals, and other materials related to the topic were reviewed. Consequent to the reviews, the study revealed that signals of insolvency of a corporate organization are detectable if the auditors are thorough and exercise professional due diligence and care in carrying out the audit assignments. The study recommended that the international auditing standards (IAS) should consider including in the standards, such sensitive variables as fraud and insolvency for special treatment and reporting in the auditing standards and guidelines. While auditors’ independence should not be compromised for whatsoever reasons, the international auditing standards should mandate auditors to conduct a predictive analysis of clients’ going-concern health condition diagnostic analyses to give respite and significant comfort and assurance to investors, and other financial statement users who might rely on the auditor’s reports in making informed investment decisions.


  • Auditors
  • Audit independence and care
  • Expectation gaps
  • References

    Altman, E. I. (2018). Applications of distress prediction models: What have we learned after

    50 years from the Z-Score models? International Journal of Financial Studies, 6(5), 1-



    Altman, E. I., Ma?gorzata, I.., Erkki, K. L., & Arto Suvas, A. (2017).Financial distress prediction

    in an international context: A review and empirical analysis of Altman’s Z-Score model. Journal of International Financial Management and Accounting, 28(4), 131-147.


    Amani, F. A., & Fadlalla, A. M. (2017). Data mining applications in accounting: A review of the

    literature and organizing framework. International Journal of Accounting Information Systems, 24(6), 32–58.


    Amin, Keval, Jagan Krishnan, and Joon Sun Yang. 2014. Going concern opinion and cost of

    equity. Auditing: A Journal of Practice and Theory, 33(5), 1–39.


    Bauweraerts, J. (2016). Predicting bankruptcy in private firms: Towards a stepwise

    regression procedure. International Journal of Financial Research, 7(1), 147–53.


    Beaver, W, H. 1968. Alternative accounting measures as predictors of failure. The Accounting

    Review, 43(3), 113–22.


    Bellovary, J. L., Don, E. G., & Akers, M. D. (2007). A review of bankruptcy

    prediction studies: 1930 to present. Journal of Financial Education, 33(1), 1–42.


    Berglund, N. R., Eshleman, J. D., & Guo, P. (2018). Auditor size and going concern reporting.

    Auditing. A Journal of Practice & Theory, 37(91), 1–25.


    Cao, Jian, Thomas R. Kubick, and Adi N.S. Masli. 2017. Do corporate payouts signal going-

    concern risk for auditors? Evidence from audit reports for companies in financial distress. Review of Quantitative Finance and Accounting, 49(2), 599-631.


    Carson, E., Neil, E., & Zhang, Y. (2016). Trends in auditor reporting in Australia: A synthesis

    and opportunities for research. Australian Accounting Review, 26(1), 26–42.


    Cenciarelli, Velia, G., Giulio, G., & Allegrini, M. (2018). External audit and bankruptcy

    prediction. Journal of Management and Governance, 22(2), 1–28.


    Chen, Y., Yang, C., & Yi-Fang, Y. (2020). Higher academic qualifications, professional

    training and operating performance of audit firms. Sustainability, 12(12), 1-20.

    Doi: 10.3390/su12031254.


    Chen, Ch., Xiumin, M.., & Xin, W. (20130. Insider trading, litigation concerns, and

    auditor going-concern opinions. The Accounting Review, 88(1), 36-53.


    Chen, P. F., He, S., Ma,Z., & Derrald , S. (2016). The information role of audit opinions in debt

    contracting. Journal of Accounting and Economics, 61(7). 121–44.


    Chen, Y., John Daniel Eshleman,, and Jared S. Soileau. 2017. Business strategy and auditor

    reporting. Auditing: A Journal of Practice & Theory 36: 63–86.


    Cultrera, L., & Xavier, B. (2016). Bankruptcy prediction: The case of Belgian SMEs. Review of

    Accounting and Finance, 15(2), 1–23.


    Eutsler, J., Nickell, E. B., & Sean, W., & G. Robb, G. (2016). Fraud risk awareness and the

    likelihood of audit enforcement action. Accounting Horizons, 30(2), 379–92.


    Feng, M., & Chan, L. (2014). Are auditors professionally skeptical? Evidence from auditors’

    going-concern opinions and management earnings forecasts. Journal of Accounting Research, 52, 1061-1085.


    Geiger, M. A., Raghunandan, K., & William Riccardi, W. (2014). The global financial

    crisis: US bankruptcies and going-concern audit opinions. Accounting Horizons 28, 59–75.


    Goncharov, I., Werner, J. R., Zimmermann, J. (2009). Legislative demands and economic

    realities: Company and group accounts compared. International Journal of Accounting, 4(4), 334-362.


    Guiral, A., Rodgers, W., Ruiz, E., & Gonzalo, J. A. (2018). Ethical dilemmas in auditing:

    Dishonesty or unintentional bias? Journal of Business and Ethics, 9(1), 151-166.


    Hardle, W. K., Rouslan, A. M. & Dorothea, S. (2004). Rating Companies with

    Support Vector Machines. German Institute for Economic Research, Discussion Papers, No. 416. Berlin: German Institute.


    Ittonen, K., Per, C. T., & Wong, L. (2017). Substantial doubt and the entropy of

    auditors’ going concern modifications. Journal of Contemporary Accounting & Economics, 13(1), 134–47.


    Jiang, P., Hu, Y. C., Wang, W., Jiang, H., & Wu, G. (2020). Interval grey prediction models with

    forecast combination for energy demand forecasting. Mathematics, 6(8), 1-15.


    Kausar, A., & Lennox, C. S. (2017). Balance sheet conservatism and audit reporting

    conservatism. Journal of Business Finance & Accounting 44(4), 897-924.


    Kausar, A., Richard, J., Christine, E. L., & Tan. (2017). Legal regimes and investor response to

    the auditor’s going-concern opinion. Journal of Accounting, Auditing & Finance, 32(1), 40-72.

    Koh, W., & Kin-Wai, L. (2017). Do Auditors Recognize Managerial Risk-Taking

    Incentives? International Journal of Business, 22(4). 206–29.


    Korol, Tomasz. 2013. A new Approach to Ratio Analysis in an Enterprise. Warszawa: Wolters

    Kluwer Polska. International Studies of Accounting, 2(12), 1-21.


    Lioukas, C. S., & Reuer, J. J. (2015). Isolating trust outcomes from exchange relationships:

    Social exchange and learning benefits of prior ties in alliances. Academy and Management Journal, 5(8), 1826–1847.


    Martin, A., Lakshmi, T. M., & Venkastesan, V. P. (2014). A framework to develop qualitative

    bankruptcy prediction rules Using Swarm Intelligence. St. Joseph’s Journal of Humanities and Science 2(1), 73–81.


    McEvily, B., Zaheer, A., & Kamal, D. F. (2017). Mutual and exclusive: Dyadic sources of trust

    in interorganizational exchange. Organizational Science, 28(8), 74–92.


    Munoz-Izquierdo, N., Camacho-Miñano, M., Segovia-Varga, M., & Pascual-Ezama, D. (2019).

    Is the external audit report useful for bankruptcy prediction? Evidence using artificial intelligence. International Journal Financial Studies, 7(20), 1-23. Doi:10.3390/ijfs7020020


    Ohlson, J. A. (1980). Financial ratios, and the probabilistic prediction of bankruptcy. Journal of

    Accounting Research, 18(2), 109–31


    Okpala, K. E. (2015). Stamatis generic model and audit quality in Nigeria. The Journal of Social

    Sciences Research, 1(8), 94-101.


    Ole-Kristian, H., Hu, D., & Zhao, W. (2017). Third-party consequences of short-selling threats:

    The case of auditor behavior. Journal of Accounting and Economics, 63, 479–98.


    Opoku, A. K., & Chizema Amon, C. (2017). Board audit committee and corporate

    insolvency. Journal of Applied Accounting Research, 18(9), 298–316.


    Philippe, D. J. (2015). Bankruptcy prediction using terminal failure processes. European

    Journal of Operational Research, 24(2), 286–303.


    Prusak, (2018). Review of research into enterprise bankruptcy prediction in selected Central and

    Eastern European Countries. International Journal of Accounting Studies, 6(16), 1-21.


    Read, W. J., & Yezegel, A. (2016). Auditor tenure and going concern opinions for

                bankrupt clients: Additional evidence. Auditing: A Journal of Practice and Theory, 35(1),             163–79.


    Read, W. J., & Ari Yezegel, A. (2018). Going-concern opinion decisions on bankrupt clients:

    Evidence of long-lasting auditor conservatism? Advances in Accounting 40: 20–26.


    Pedrosa R., Áurea, M., & Francisco L.  (2018). Auditors’ response to the global financial crisis:

    Evidence from Spanish non-listed companies. Spanish Journal of Finance and Accounting, 47, 40–53.


    Rodgers, W., Guiral, A., & Gonzalo, J. A. (2009). Different pathways that suggest whether

    auditors’ going concern opinions are ethically based. Journal of Business and Ethics,

    8(6), 347-361.


    Rodgers, W., Guiral, A., & Gonzalo, J. A. (2019) Trusting/distrusting auditors’ opinions.

    Sustainability, 19(2), 1-21


    Sanchez-Serrano, J. R., Alaminos, D., Francisco, G. ., & Callejón-Gil, A. M. (2020). Predicting

    audit opinion in consolidated financial statements with artificial neural networks. Mathematics, 8(3), 1-14. Doi: 10.3390/math8081288.


    Seising, R. (2018). The Emergence of fuzzy sets in the decade of the perceptron—lotfi, a.

    Zadeh’s and Frank Rosenblatt’s research work on pattern classification. Mathematics 2018, 6, 110.


    Shin, K., & Lee, Y. (2012). A genetic algorithm application in bankruptcy prediction modelling.

    Expert systems with applications, 23(1), 321–28.


    Sotti, F. ((2018). The value relevance of consolidated & separate financial statements: Are

    non-controlling interests relevant? African Journal of Business and Management,

    12(3), 329–333.


    Zavgren, C. (1983). The prediction of corporate failure: The state of the art. Journal of

    Accounting Literature, 2(2), 1–38.