The Effect of Real Earning Management on Going-the Concern Audit Opinions in Financially Distressed Firms

Financial statement information is one of the potential sources used by auditors to assess the entity's going-concern determination. However, the numbers reported in the financial statements may not fully reflect all available information about entity's performance. Therefore, auditors' attention to non-financial factors is necessary when assessing the going-concern client. Earning management through manipulation of real activities can be one of the non-financial factors that are relevant to the likelihood of auditors’ going-concern opinions considering its detrimental consequences on the long-term performance of the company, especially those with poor financial health. Hence, the purpose of this study was to investigate the effect of real earning management on the going-concern audit opinion for financially distressed firms. To achieve the research goal, the information related to 194 financially distressed firm-years listed in Tehran Stock Exchange (TSE) was collected for the period 2009-2019. The results showed that real earning management through operating cash flows and manipulation of discretionary expenses has a positive and significant effect on the likelihood of the going-concern uncertainty paragraph in the audit report; However, no evidence was found on the significant effect of real earning management through manipulation of production costs on the likelihood of the going-concern uncertainty paragraph in the audit report.