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Archives of Business Research – Vol. 9, No. 9
Publication Date: September 25, 2021
DOI:10.14738/abr.99.10797. Gulo, W., & Setyawati, D. M. (2021). The Effect of Financial Distress, Company Size, and Previous Year’s Audit Opinion on Going
Concern Audit Opinion of Textile and Garment Sub Sector Companies. Archives of Business Research, 9(9). 55-68.
Services for Science and Education – United Kingdom
The Effect of Financial Distress, Company Size, and Previous
Year’s Audit Opinion on Going Concern Audit Opinion of Textile
and Garment Sub Sector Companies
Wininatalia Gulo
Accounting Department, Gunadarma University, Jakarta, Indonesia
Dyah Mieta Setyawati
Accounting Department, Gunadarma University, Jakarta, Indonesia
ABSTRACT
Going concern audit opinion is an audit opinion that given by the auditors when
they have doubts about the company's ability to sustain its business. The purpose
of this study is to determine the influence of financial distress, company size, and
the previous year’s audit opinion on going concern audit opinion. The data used is
secondary data of textile and garment sub-sector companies listed on the Indonesia
Stock Exchange. The sampling method used was purposive sampling method. The
samples used were 15 companies in the textile and garment sub-sector with the
2016-2019 research period. The analysis technique used was the modified Altman
method and logistic regression analysis with the help of SPSS version 26. The results
of the analysis show that financial distress and the previous year's audit opinion
have an effect on going-concern audit opinion. Meanwhile, company size has no
effect on going concern audit opinion. And the overall results show that financial
distress, company size, and previous year's affect on going concern audit opinion.
Keywords: Financial Distress, Company Size, Previous Year’s Audit Opinion, Going
Concern Audit Opinion
INTRODUCTION
In recent years, Indonesia has shown a positive progress in economic growth in the industrial
sector. This also shows that the development of the business world in Indonesia has
consistently progressed from year to year since the monetary crisis in 1997. One of the main
commodities driving Indonesia's economy in recent years comes from the manufacturing
industry. The manufacturing industry itself consists of 3 sectors, namely: the basic industrial
sector and chemicals, various industrial sectors, and the goods and consumption industry
sector. The various industrial sectors consist of several sub-sectors, one of which is the textile
and garment sub-sector.
The textile and garment sub-sector is a large-scale industrial sector that focuses on the
manufacture of clothing. The textile and garment sub-sector is a large-scale industrial sector
that focuses on the manufacture of clothing. Reporting from the website of the Ministry of
Industry of the Republic of Indonesia (kemenperin.go.id), this sector is the 3rd largest
contributor to foreign exchange in Indonesia after the palm oil industry and the tourism sector.
As one of the labor-intensive sectors, this sector is considered to be able to boost the country's
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economy in facing industry 4.0. The government itself is trying to reform the textile and
garment sub-sector because it is considered that in recent years it has weak competitiveness.
The textile and garment sector tends to have a weak financial condition, seen from the number
of companies that do not experience consistent profit increases. Therefore, it is likely that many
companies in this sector will get a going concern audit opinion.
The going concern of a business entity is very important for both company management and
investors. This is an assessment factor for investors to see the company's ability to maintain its
business before investing in the company concerned. These investors will usually see the
company's performance by analyzing and evaluating the company's financial statements before
deciding to invest. In presenting this financial report, an independent third party is needed
whose role is to bridge the main interests between the company and the investor, in this case
an expert, namely an auditor or public accountant. There are several things that become the
basis for an auditor before giving a going concern audit opinion. As for the main element of
auditors in assuming the ability of a company to maintain its business continuity is the
company's bad financial ratio (SPAP, 2011). This condition is usually triggered by financial
distress at the company. According to Hofer (1980:20) quoted by Lestari and Prayogi (2017)
states that financial distress is a condition in which a company experiences negative net profit
for several years, which is an indication that the company is leading to bankruptcy. Auditors
usually tend to provide a going concern audit opinion when they see that the company is
experiencing a higher probability of bankruptcy. This will continue until the financial condition
and performance of the company are better than the previous years and have a positive impact
on the company's survival (Listantri and Mudjiyanti, 2016). Apart from financial distress, the
size of the company is also considered to be a determining factor for a company to accept going
concern audit opinion. The size of the company itself can be shown in various ways, such as
from the total asset value, sales, market capitalization, the number of workers, and so on.
According to Alichia (2013), company size has a significant effect on going-concern audit
opinion. The previous year's audit opinion is also one of the main factors for an auditor in
providing a going concern audit opinion. According to Wibisono (2013) and Fahmi (2015), the
previous year's audit opinion has a significant effect on going concern audit opinion. It is
probable that a business entity will receive a going concern audit opinion again if in the
previous year it also received a going concern audit opinion. This is based on the decline in the
level of confidence of investors and creditors in the company's ability to sustain its business.
LITERATURE REVIEW AND HYPOTHESES
Going Concern Audit Opinion
Going concern or business continuity is a condition that guarantees the company in the future
can continue to operate and maintain itself as a business entity. Going concern problems are
divided into two, namely financial problems which include liquidity deficiency, equity
deficiency, debt arrears, difficulty obtaining funds, and operational problems which include
continuous operating losses, dubious income prospects, threatened operating capabilities and
weak control. over operations (Altman McGough, 1974 in Kristiana, 2012). In auditing, an
auditor has the responsibility to submit an assessment of the company's ability to sustain its
business. Going concern audit opinion is a modified audit opinion that given by the auditor if
he has doubts about the ability of the company's going concern to carry out its activities within
an appropriate period, not more than one year from the date of the audited financial report. An
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Gulo, W., & Setyawati, D. M. (2021). The Effect of Financial Distress, Company Size, and Previous Year’s Audit Opinion on Going Concern Audit Opinion
of Textile and Garment Sub Sector Companies. Archives of Business Research, 9(9). 55-68.
URL: http://dx.doi.org/10.14738/abr.99.10797
audit opinion that is included in a going concern audit opinion is an unqualified opinion with
explanatory language, a fair opinion with exceptions, an unfair opinion, and no opinion (SPAP,
2011).
Financial Distress
Financial distress or financial difficulties is describing of the true health of a company on its
financial performance in one work period. Companies will usually experience financial distress
before going bankrupt. Hofer (1980:20) in Lestari and Prayogi (2017) likens financial distress
as a condition of a company that has experienced negative net profit in recent years which can
indicate the company is heading for bankruptcy. Bankruptcy itself is one of the company's
failures in maintaining its business to generate profits.
Predicting financial distress or bankruptcy in a company will have a positive impact on users of
these financial statements. The parties with an interest in the financial statements will have
more awareness of the business continuity of the company concerned. One of the financial
distress prediction models that is often used by manufacturing companies, both private and
public, is the Altman model (Lestari and Prayogi, 2017).
Altman Model
One of the most famous models for predicting financial distress is the Altman Z-score model.
Edward Altman is an economist and professor at New York's Stern School of Business and
developed the Altman model in 1968. This model uses several ratios to create a predictor of
financial distress. With statistical techniques (multiple discriminant analysis) which is a linear
function of several explanatory variables, this tool is able to classify or predict the possibility of
company bankruptcy or not.
In Edi and Tania (2018) there are three versions of the Z-score analysis, namely: the first
version is for analysis on manufacturing companies that have gone public; this version of the
analysis is not only applicable to publicly traded manufacturing companies but also applies to
companies in the private sector; and the last is a modified version that can be applied to all
companies, such as manufacturers, non-manufacturers, and bond issuing companies in
developing countries (emerging market). In this study the author will use the modified Altman
model to determine the financial distress that will predict the bankruptcy of the textile and
garment manufacturing companies listed on the Indonesia Stock Exchange. This method is
considered effective because it is the result of an update from the previous Altman method and
can be applied to all industrial sectors.
The equation of the modified Altman method is:
Z” = 6,56X1 + 3,26X2 + 6,72X3 + 1,05X4
Company Size
Company size in general can be interpreted as a comparison of the size or size of a company as
an object. Company size can be expressed in terms of total assets, sales and market
capitalization. According to Kristiana (2012), of the three variables, asset value is relatively
more stable than the market capitalized value and sales in measuring the company, so this study
will use the amount of assets owned by the company as a proxy for company size.
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Archives of Business Research (ABR) Vol. 9, Issue 9, September-2021
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Here is the formula for calculating the size of a company:
Size = Ln (Total Assets)
Previous Year's Audit Opinion
The previous year's audit opinion is the audit opinion received by the company in the previous
year or one year prior to the research year. Therefore, giving a going concern audit opinion
cannot be separated from the previous year's audit opinion, because the business activities of
a company for a certain year cannot be separated from the circumstances that occurred in the
previous year. The previous year's audit opinion was grouped into two groups, namely auditees
with going concern audit opinion and auditee without going concern audit opinion (Solikah,
2007 in Wibisono 2013). Companies that receive a going concern audit opinion in the previous
year are considered to have problems in maintaining their survival, so it is likely for the auditor
to issue a going concern audit opinion.
Research Framework and Research Hypotheses
Figure 1: Research Framework
Based on a research framework in Figure 1, the hypothesis in this research is:
H1: Financial distress has an effect on going concern audit opinion
H2: Company size has an effect on going concern audit opinion
H3: Previous year’s audit opinion has an effect on going concern audit opinion
H4: Financial distress, company size, and the previous year's audit opinion affect on going
concern audit opinion
Research Data
1. Textile and garment manufacturing companies listed on the IDX in 2015-2019
2. Financial reports and auditors' reports of textile and garment manufacturing companies in
2015-2019
Financial Distress
(X1)
Dewi and Latrini (2018)
Ibrahim and Raharja (2
014)
Company Size
(X2)
Kristiana (2012)
Nugroho, et al (2018)
Previous Year’s Audit O
pinion (X3)
Wibisono (2013)
Fahmi (2015)
Going Concern Audit Opinio
n
(Y)
Listantri and Mudjiyanti (20
16)