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According to Baldwin and Scott, when a firms business deteriorates to the point where it cannot meet its financial obligation, the firm is said to have entered the state of financial distress. Whitaker (1999) defines the entry into financial distress as the first year in which cash flows are less than the current maturity of long-term debt. In Malaysia, there are more companies that face financial distress after the hit of economy crisis on 1997 and 2008. Bursa Malaysia is the stock market regulator in Malaysia. In order to deal with the financial distress company, Bursa Malaysia has introduced the Practice Note No.17/2005 (PN17). It is to give a timeframe for those companies to undertake financial restructuring plan. The provision gives opportunity for those affected company to turn around and to be fully listed again. Bursa Malaysia will list those companies under PN17, and if they can restructure the financial performance for the company in timeframe given, they will be delisted from the list of PN17. The prediction of financial distress is an important and challenging issue that has served as the impetus for many academic studies over the past three decades (Beaver, 1966). The prediction is important to the company itself, potential and current investors. Financial performance of the company is one of the elements that need to be tested by the auditor when they issue the auditor report.
Dynamic economic environment has causes the increase of bankruptcy filing of companies. Similar to the failing of the entity is the inability of the entity to going concern. Normally, financial statements are prepared under assumption that the entity will not liquidate or scale down the operation size. ISA 570 stated that when an entity receives a going concern opinion from the auditor, the entity is viewed as continuing business for the foreseeable future. ISA 570 has provided guidelines for auditors in Malaysia to issue opinion on the going concern assumption. The entity will be able to realize its assets and discharge its liability in the normal course of business if the entity is said to be going concern. In the ISA 570, if there is characteristics of the listed indicators exist, auditors should assume that the entity will be going concern. Some of the indicators are recurring losses of the operation, internal matters such as loss of key personnel, external matters such as pending litigation, inability to pay loan and significant changes in the market which affects competitiveness of the company.
The going concern evaluation will be based on the information obtained from the audit procedures which the auditor normally set to performed to test the audit assertions on the management of the company, Auditor will need to evaluate the client's ability to going concern and provide a going concern opinion when they have doubt on the client's future viability (Stanley, Todd De Zoort & Taylor, 2009). Separate procedures will need to be done if auditors believe that there is substantial doubt on the ability of going concern of the company. The evaluation of going concern is a task that involves professional judgments from the auditors. Auditors have the responsibility to inform the stakeholders when there is a doubt of reasonableness of the going concern of the company exists. They are responsible to obtain sufficient audit evidence about the appropriateness on the use of going in concern assumption in the preparation and presentation of the financial statement. However this standard is quite general and lacks of technical guidance and it gives rise to different verdicts among the auditors when dealing with client with going concern problem (Atef, Suhaimi & Zakimi, 2002).
Going concern assumption will have effects on the financial statements and the audit report. When auditors have doubt on the ability of the client to go concern, they will evaluate the adequacy of the financial statement being audited. More disclosures will need to be done on the conditions causing the doubt on going concern, management's plans to overcome the issue and information about the effect on the assets and liabilities. Whereas for audit report, explanatory paragraph should be added to the auditor's report when auditor has doubt on the going concern of the client. It is not necessary to issue a disclaimer but the paragraph will need to include the description on the management financial problems and its plan to mitigate it. If there is insufficient disclosure from the client, auditor normally will issue the qualified audit report. The audit report is the medium that the stakeholders to use to make decisions and value the company. Therefore, the report must reflect the performance and situation of the entity. The importance of the auditor's report takes greater meaning when the client faces financial distress that could threaten its going concern status.
1.2 Problem statement
There is a growing concern of the financial distress condition of the listed company in the Malaysia. Bursa Malaysia has been updating the company list that has the financial health problem that grouped under PN17. Companies under the PN17 category will need to regularize their financial condition and plans to solve the financial issue in the timeframe given to avoid from delisted. Going concern opinion issued by the auditors will signal the stakeholders on the potential financial failure of the company. Those investors and the creditors will able to take action after knowing the company's financial status in order to reduce their losses.
There are different audit reports received by the company under PN17 in the Bursa Malaysia. Some of them are still using the assumption that they are able to go concern even though they have financial distress issue. This has raises the research question for this study on the financial distress level and the issuance of the going concern report by the auditors. It casts doubt on whether the audit report is reflecting the exact financial condition of the company. Therefore, the main research question will be whether the financial distress level of the company will affect the going concern opinion issued by the auditors.
1.3 Research objectives
According to the problem statement as discussed above, the purpose of this study is to examine the relationship of the company's financial distress level and issuance of going concern opinion. It studies about the likelihood of issuing of going concern opinion when there is difference financial distress level facing by the company. It investigates the company financial distress level is one of the factors that causes different going concern opinion issued by the auditors in Malaysia. It also investigates the effectives of the going concern opinion issued by the Malaysia auditor to reflect the severity of financial distress that faced by the companies.
1.4 Contribution of study
The finding of the study will enhance knowledge on one of the antecedents of going concern opinion. It shows whether level of financial distress level affect the issuance of going concern opinion from the auditor. This paper makes significant contribution in terms of valuating the effectiveness of the going concern opinion to reflect the severity of the financial distress facing by the company.
The user of audit report can be more understand the indicator of the issuance of non-going concern opinion. The findings of the study will give sightings for the users on when will the auditor assumes that the company is not going concern when it reach a certain level of the financial distress that is severe. The users will be aware in the making business decision process when the indicators exist in the business operation. The user of the audit report will understands that when a non-going concern opinion is issued, the company is in what stage of the distress level and hence improve their understanding of financial performance of the company involved.
Besides that, this study also provides guidance to the accounting profession on financial distress level of company will lead different type of audit report to be issued. Financial distress faced by the companies is different from each other. If the audit report does not reflect accurately on the financial performance of the company, auditor judgment and independence can be questioned.
This chapter briefly discuss about the study that is going to be conducted. The parts that have been discussed are the background of the study, the problem statement that leads to the study, the objective of the study and lastly the contribution of the study. The following chapter will discuss on the prior studies that had done on issues that related to the study that is going to be conducted.