Showing papers on "Audit published in 2008"

Exposing Corrupt Politicians: The Effects of Brazil's Publicly Released Audits on Electoral Outcomes

Abstract: This paper examines the extent to which access to information enhances political accountability. Based upon the results of Brazil’s recent anti-corruption program that randomly audits municipal expenditures of federally-transferred funds, it estimates the effect of the disclosure of local government corruption practices upon the re-election success of incumbent mayors in municipal elections. Comparing municipalities which were randomly audited before the elections with those audited after, the analysis shows that the disclosure of audit results had a significant impact on the re-election rates of mayors found to be corrupt. For a one standard deviation increase in reported corruption, the audit policy reduced the incumbent’s likelihood of re-election by 25 percent. This effect is more pronounced in municipalities where radio stations are present and higher levels of corruption are identified. These findings highlight the value of information and the role of the media in reducing informational asymmetries in the political process, thus enabling voters to not only hold corrupt politicians accountable but also to reward non-corrupt politicians.

The Financial and Market Effects of the SEC's Accounting and Auditing Enforcement Releases

Abstract: ed in the Journal of Economic Literature, September 1992, this paper explores three questions related to the SEC's accounting enforcement program: (1) what types of accounting and auditing problems motivate enforcement actions, (2) what are the consequences of investigations on targets' financial statements, managers, and auditors, and (3) how do investors and other market agents view the SEC's actions? The SEC enforcement program, which consists of investigations and subsequent injunctive actions or administrative proceedings against offending registrants and auditors, is designed "to concentrate on particular problem areas and to anticipate emerging problems" (SEC,1989,p.1). The potential for SEC enforcement action provides incentives for corporate officers and independent CPAs to avoid unacceptable practices whose "effective prosecution is essential to preserving the integrity of the disclosure system" (SEC, 1989,p.81). The SEC summarizes its accounting-based enforcement actions in the Accounting and Auditing Enforcement Releases (AAERs). We examined 224 AAERs, issued between April 1982 and April 1989, describing the results of investigations against 188 firms. In the sample period, the SEC most often pursued overstatements of accounts receivable and inventories resulting from premature revenue recognition and delayed write-off, respectively. These two accounts make up 70% of the investigations. The income effects of these financial disclosure violations average more than 50% of reported income. We find that the disclosure of these reporting violations changed expectations of targets' future earnings as reflected in financial analysts' reduced earnings estimated after the disclosures.Disclosures and investigations of reporting violations have other consequences. Typically, targets' managers settle enforcement actions by consenting to an injunction that prohibits future violations of securities laws. Subsequently, more than 72% of the enforcement targets fired or forced the resignations of top managers and 81% were sued by their shareholders. In 42% of our sample, the SEC also censured the target's auditor; criticisms and penalties were more likely for smaller audit firms. In exploring how market agents react to the enforcement process, we focus on market returns around disclosures of alleged reporting violations, investigations, and final settlements. Disclosures of reporting violations are associated with average two-day abnormal returns of -13%; the magnitude of these returns is highly correlated with the earnings impact of the disputed accounting. We also observe abnormal returns of -6% at disclosures of investigations, even when the accounting errors were announced earlier. These negative returns imply substantial incentives for managers to avoid these investigation. We do not observe any changes in targets, share values at the investigations' final settlement. Section 2 describes the SEC enforcement process. Section 3 documents the effects of the SEC investigations and settlements on firms' financial statement, managers, and auditors. Section 4 addresses the stock market's reactions to the disclosure of reporting violations, investigations, and settlements. Section 5 provides conclusions and policy implications.

Does public policy support or undermine climate change adaptation? Exploring policy interplay across different scales of governance

Abstract: Policy makers have now recognised the need to integrate thinking about climate change into all areas of public policy making. However, the discussion of ‘climate policy integration’ has tended to focus on mitigation decisions mostly taken at international and national levels. Clearly, there is also a more locally focused adaptation dimension to climate policy integration, which has not been adequately explored by academics or policy makers. Drawing on a case study of the UK, this paper adopts both a top-down and a bottom-up perspective to explore how far different sub-elements of policies within the agriculture, nature conservation and water sectors support or undermine potential adaptive responses. The top-down approach, which assumes that policies set explicit aims and objectives that are directly translated into action on the ground, combines a content analysis of policy documents with interviews with policy makers. The bottom-up approach recognises the importance of other actors in shaping policy implementation and involves interviews with actors in organisations within the three sectors. This paper reveals that neither approach offers a complete picture of the potentially enabling or constraining effects of different policies on future adaptive planning, but together they offer new perspectives on climate policy integration. These findings inform a discussion on how to implement climate policy integration, including auditing existing policies and ‘climate proofing’ new ones so they support rather than hinder adaptive planning.

Audit culture and Illiberal Governance: Universities and the Politics of Accountability

Abstract: The economic imperatives of neoliberalism combined with the technologies of New Public Management have wrought profound changes in the organization of the workplace in many contemporary capitalist societies. Calculative practices including `performance indicators' and `benchmarking' are increasingly being used to measure and reform public sector organizations and improve the productivity and conduct of individuals across a range of professions. These processes have resulted in the development of an increasingly pervasive `audit culture', one that derives its legitimacy from its claims to enhance transparency and accountability. Drawing on examples from the UK, particularly the post-1990s' reform of universities, this article sets out to analyse the origins and spread of that audit culture and to theorize its implications for the construction of academic subjectivities. The questions I ask are: How are these technologies of audit refashioning the working environment and what effects do they have on behavio...

Determinants of the Adoption of Sustainability Assurance Statements: An International Investigation

Abstract: This paper explores the factors associated with the voluntary decisions to assure social, environmental and sustainability reports. Since the market for assurance services in this area is in its formative stages, there is a limited understanding of the demand for this emergent non-financial auditing practice, which is evolving rapidly across different countries. Drawing from extant literature in international auditing and environmental accounting, we focus on a set of country-level institutional factors to explain the adoption of sustainability assurances statements among an international panel of 212 Fortune Global 250 companies for the years 1999, 2002 and 2005. Consistently with our expectations, our results provide evidence that companies operating in countries that are more stakeholder-oriented and have a weaker governance enforcement regime are more likely to adopt a sustainability assurance statement. Further, the demand for assurance is higher in countries where sustainable corporate practices are better enabled by market and institutional mechanisms. Our exploratory findings also indicate that the likelihood to choose a large accounting firm as assurance provider increases for companies domiciled in countries that are shareholder-oriented and have a lower level of litigation. We conclude the paper suggesting three directions of research in the area of sustainability assurance that have relevant academic and practical implications.

Audit partner tenure, audit firm tenure, and discretionary accruals: Does long auditor tenure impair earnings quality?

Abstract: Audit partner rotation has been adopted in several countries, but the academic research has not investigated the relation between audit partner tenure and earnings quality. We investigate the relation using a sample of Taiwanese listed companies for which the audit report must show the audit partners’ names. We find a significantly negative relation between audit partner tenure and absolute discretionary accruals, a proxy for earnings quality. The negative relation mainly occurs after five to seven years of audit partner-client relationship. When audit firm tenure and audit partner tenure are analyzed simultaneously, audit firm tenure is not significantly related to absolute discretionary accruals but audit partner tenure is. Collectively, our evidence does not support the hypotheses that earnings quality decreases with audit partner tenure and that audit firm tenure decreases with earnings quality after controlling for audit partner tenure.

Does the SOX Definition of an Accounting Expert Matter? The Association between Audit Committee Directors' Accounting Expertise and Accounting Conservatism*

Abstract: The Sarbanes-Oxley Act (SOX) (U.S. Congress 2002) mandates the disclosure of whether the audit committee includes a financial expert. ' However, the operationalization of who is a financial expert was and still is a controversial issue (Plitch and Ceron 2003). Some have argued that effective audit committee members are those who have general management experience rather than those who have an accounting or financial background (Olson 1999). The Securities and Exchange Commission (SEC) initially proposed a narrow definition to include only accounting financial experts — that is, directors with experience as a certified public accountant (CPA), auditor, chief financial officer (CFO), controller, or chief accounting officer. Subsequently, the SEC defined financial expert broadly to include nonaccounting financial experts, such as directors with experience as a chief executive officer (CEO) or president (SEC 2003).2 Was the SEC correct in defining financial experts to include both accounting and nonaccounting experts? Do accounting financial experts enhance the quality of financial reporting more than nonaccounting financial experts? These are important questions because the primary objective of SOX was to restore credibility to the U.S. financial reporting system, which was tarnished by several high-profile accounting scandals. Because the audit committee is the ultimate monitor of the financial reporting process, the audit committee's financial expertise is a key determinant of its effectiveness (Treadway 1987). We contribute to this debate by separately examining the association between the audit committee's accounting financial expertise and nonaccounting financial expertise and several attributes of financial reporting quality.

Audit Quality and Properties of Analyst Earnings Forecasts

Abstract: Under the assumption that audit quality relates positively to unobservable financial reporting quality, we investigate whether audit quality is associated with the predictability of accounting earnings by focusing on analyst earnings forecast properties. The evidence shows that analysts' earnings forecast accuracy is higher and the forecast dispersion is smaller for firms audited by a Big 5 auditor. We further find that auditor industry specialization is associated with higher forecast accuracy and less forecast dispersion in the non‐Big 5 auditor sample but not in the Big 5 auditor sample. Overall, our results suggest that high‐quality audit provided by Big 5 auditors and industry specialist non‐Big 5 auditors is associated with better forecasting performance by analysts.

Litigation Risk, Audit Quality, and Audit Fees: Evidence from Initial Public Offerings

Abstract: We use the IPO setting to examine the relation between auditor exposure to legal liability and audit quality and audit fees. With regard to audit quality, we report robust evidence that pre-IPO audited accruals are negative and less than post-IPO audited accruals. In contrast to extant literature, our findings provide scant support for the inference that auditors acquiesce to opportunistic earnings management by issuers in an attempt to increase the offering price. With regard to audit fees, we find auditors earn higher fees for IPO engagements than post-IPO engagements. While inherent differences in auditor responsibilities between IPO audits and post-IPO audits should lead to higher fees for IPOs, a substantial portion of IPO audit fees (in levels and changes) is associated with our proxy for the auditor’s 1933 Act exposure. Overall, our results suggest that both audit quality and audit fees are higher in a higher-litigation regime, consistent with the effects an increase in litigation exposur...

Determinants of the adoption of sustainability assurance statements: an international investigation

Abstract: This paper explores the factors associated with voluntary decisions to assure social, environmental and sustainability reports. Since the market for assurance services in this area is in its formative stages, there is a limited understanding of the demand for this emergent non-financial auditing practice, which is evolving rapidly across different countries. Drawing from extant literature in international auditing and environmental accounting, we focus on a set of country-level institutional factors to explain the adoption of sustainability assurance statements among an international panel of 212 Fortune Global 250 companies for the years 1999, 2002 and 2005. Consistent with our expectations, our results provide evidence that companies operating in countries that are more stakeholder oriented and have a weaker governance enforcement regime are more likely to adopt a sustainability assurance statement. Further, the demand for assurance is higher in countries where sustainable corporate practices are better enabled by market and institutional mechanisms. Our exploratory findings also indicate that the likelihood of choosing a large accounting firm as assurance provider increases for companies domiciled in countries that are shareholder oriented and have a lower level of litigation. We conclude the paper by suggesting three directions of research in the area of sustainability assurance that have relevant academic and practical implications

Corporate governance and agency conflicts

Abstract: I investigate whether corporate governance is associated with the level of agency conflicts in firms. I employ exploratory principal components analysis on 22 individual governance variables to obtain seven factors that represent the different dimensions of governance for a firm. I measure the level of agency conflicts in firms based on seven proxies for agency conflicts used in the literature. I find that firms with greater agency conflicts have better governance mechanisms in place, particularly those related to the board, audit committee, and auditor. I also find that the composition and functioning of the board, the independence of the auditor, and the equity-based compensation of directors are significantly associated with firm performance, but primarily for firms with high agency conflicts. Overall, the results support the theory that the existence and role of various governance mechanisms in a firm are a function of the level of agency conflicts in the firm. Copyright (c), University of Chicago on behalf of the Institute of Professional Accounting, 2008.

Financial Statement Fraud: Insights from the Academic Literature

Abstract: SUMMARY: We summarize relevant academic research findings to contribute to the Public Company Accounting Oversight Board (PCAOB) project on financial statement fraud and to offer insights and conclusions relevant to academics, standard setters, and practitioners. We discuss the characteristics of firms committing financial statement fraud, as identified in the literature, and research related to the fraud triangle. We then discuss research related to the procedures and abilities of auditors to detect fraud, and how fraud risk assessments impact audit planning and testing. In addition, we discuss several “high risk” areas and other issues as identified by the PCAOB. Finally, we summarize prior findings and offer conclusions and suggestions for areas where future research is needed.

Non-audit Service Fees and Audit Quality: The Impact of Auditor Specialization

Abstract: We posit that the effect of non-audit fees on audit quality is conditional on auditor industry specialization. Industry specialist auditors are more likely than nonspecialists to be concerned about reputation losses and litigation exposure, and to benefit from knowledge spillovers from the provision of non-audit services. We find evidence that audit quality measured by increased propensity to issue going-concern opinion, increased propensity to miss analysts' forecasts, as well as higher earnings-response coefficients increases with the level of non-audit services acquired from industry specialist auditors compared to nonspecialist auditors.

Environmental management system certification and its influence on corporate practices

Abstract: Purpose – The purpose of this paper is to analyze the existence of differences in the implementation of environmental practices between companies that possess some form of certified environmental management system (ISO 14001 or EMS) and those that do not have any such system. This study also investigates whether companies with a certified EMS are also making additional environmental demands on their suppliers.Design/methodology/approach – An empirical study utilizing survey data from automotive supplier organizations was completed. A total of 157 in‐person interviews were conducted with managers of Spanish companies which are automotive supplier organizations. Logistic regressions and non‐parametric tests are used to evaluate hypotheses.Findings – A positive relation was found to exist between the possession of certified EMS, specifically ISO 14001 and eco‐management and audit scheme, and the environmental demands that these organizations impose on their suppliers. This finding implies that environmental ...

Earnings Management and Audit Quality in Europe: Evidence from the Private Client Segment Market

Abstract: This paper contributes to the recent literature on financial reporting quality in private (i.e. non-listed) companies (Ball and Shivakumar, 2005; Burgstahler et al., 2006) by examining whether in these types of companies Big 4 audit firms, as high quality auditors, provide a constraint on earnings management. Considering incentives of auditors to supply a high audit quality in private firms, we expect that Big 4 auditors have an incentive to constrain earnings management only in high tax alignment countries, where financial statements are more scrutinized by tax authorities and the probability that an audit failure is detected is higher. Using data on private firms in European countries, this study provides evidence consistent with this expectation.

Does Auditor Reputation Matter? The Case of KPMG Germany

Abstract: We study the stock and audit market effects associated with a widely publicized accounting scandal involving a public company (ComROAD AG) and a large, reputable audit firm (KPMG) in a country (Germany) that has long provided auditors with substantial protection from shareholder legal liability. We use this event to study whether an auditor's reputation helps to ensure audit quality, a rationale for which recent literature and events provide scant support. Given the absence of a strong insurance rationale for audit quality, Germany permits a relatively clean test of whether auditor reputation matters. We find that KPMG's clients sustain negative abnormal returns of 3% at events pertaining to ComROAD, and that these returns are more negative for companies that are likely to have higher demands for audit quality. We also find an increase in the number of clients that drop KPMG in the year of the ComROAD scandal (mostly smaller, recently public companies that are similar to ComROAD). Overall, our results provide support for the reputation rationale

Audit cultures: Neoliberal governmentality, socialist legacy, or technologies of governing?

Abstract: In this article, I analyze the social processes of performance audits in a variety of cases in China, other postsocialist nations, and a U.S. workplace with Chinese immigrant employees. Although the processes share many commonalities, the ideological evaluations of them by the people involved are often diametrically opposed to those by anthropological analysts. For example, the Chinese workers often describe the performance audits as “socialist,” whereas the anthropological analysts tend to see them as a form of “neoliberal” governmentality. I use these contradictory evaluations to develop a critique of Nikolas Rose's conceptualization of “neoliberal governmentality,” especially when it is used as an explanation for contemporary processes of governing. Building on the comparative analysis of the performance audit cases, I conclude with a call for a classic anthropological approach to the study of audit cultures. [governmentality, audit cultures, China, socialism, neoliberalism]

Does Auditor Reputation Matter? The Case of KPMG Germany and ComROAD AG

Abstract: We study the stock and audit market effects associated with a widely publicized accounting scandal involving a public company (ComROAD AG) and a large, reputable audit firm (KPMG) in a country (Germany) that has long provided auditors with substantial protection from shareholder legal liability. We use this event to study whether an auditor's reputation helps to ensure audit quality, a rationale for which recent literature and events provide scant support. Given the absence of a strong insurance rationale for audit quality, Germany permits a relatively clean test of whether auditor reputation matters. We find that KPMG's clients sustain negative abnormal returns of 3% at events pertaining to ComROAD, and that these returns are more negative for companies that are likely to have higher demands for audit quality. We also find an increase in the number of clients that drop KPMG in the year of the ComROAD scandal (mostly smaller, recently public companies that are similar to ComROAD). Overall, our results provide support for the reputation rationale for audit quality.

Evidence on the Impact of Internal Control and Corporate Governance on Audit Fees

Abstract: Previous studies generally suggest that internal control and external auditing can substitute for each other, so that better internal control will be associated with lower audit fees. However, their empirical results do not support this view. In contrast, previous studies of the interaction between corporate governance and external audit services often assume that they are complementary, and that improved governance is associated with higher audit fees, although the evidence about this issue is also mixed. We examine whether the ‘substitution’ or ‘complementary controls’ views apply. We find that measures of internal auditing, corporate governance, and concentration of ownership are all positively related to audit fees, consistent with the explanation that controls are complementary. The study makes a contribution by assisting regulators in understanding the effects of regulation of corporate governance, and by showing auditors and auditing standard setters that the view that internal controls can substitute for external auditing may not be helpful. We also find that these relationships hold only in a relatively less-regulated environment.

Form versus Substance: The Implications for Auditing Practice and Research of Alternative Perspectives on Corporate Governance

Abstract: SUMMARY: The objective of this paper is to provide a more comprehensive view of corporate governance than that considered by the traditional agency literature predominately employed in auditing and accounting studies of governance. Specifically, we discuss three widely recognized additional theoretical perspectives: resource dependence, managerial hegemony, and institutional theory. Resource dependence is developed in the strategic management literature and focuses on the contribution of governance mechanisms as a vehicle to help a firm achieve or further its strategic objectives. In contrast with the agency and resource dependence perspectives which offer a functional view of governance, the managerial hegemony perspective views the board and its attendant committees as being under the control of management and hence could be potentially viewed as dysfunctional from a stakeholder viewpoint. Finally, institutional theory, developed in the sociology of organizations and organizational behavior literatures,...

Auditing Quality of Research in Social Sciences

Abstract: A growing body of studies involves complex research processes facing many interpretations and iterations during the analyses. Complex research generally has an explorative in-depth qualitative nature. Because these studies rely less on standardized procedures of data gathering and analysis, it is often not clear how quality was insured or assured. However, one can not easily find techniques that are suitable for such complex research processes to assess the quality of the study. In this paper, we discuss and present a suitable validation procedure. We first discuss how ‘diagnosing’ quality involves three generic criteria. Next, we present findings of previous research in possible procedures to assure the quality of research in social sciences. We introduce the audit procedure designed by Halpern [(1983) Auditing Naturalistic Inquiries: The Development and Application of a Model. Unpublished doctoral dissertation, Indiana University] we found an appropriate starting point for a suitable procedure for quality judgment. Subsequently, we will present a redesign of the original procedure, with according guidelines for the researcher (the auditee) and for the evaluator of the quality of the study (the auditor). With that design, we aim to enable researchers to bring forward their explorative qualitative studies as stronger and more equally valuable to studies that can rely on standardized procedures.

Auditor Industry Specialization, Auditor Changes, and Accounting Restatements

Abstract: SYNOPSIS: The increasing occurrence of accounting restatements has drawn considerable attention from regulators, audit firms, and corporate boards concerning audit and financial statement quality. Research suggests that auditor industry specialization is associated with improved error detection and greater financial statement quality. We examine the impact of auditor industry specialization on a sample of restatement and nonrestatement firms and find that auditor industry specialization is negatively associated with the likelihood of accounting restatement. In addition, focusing on the subset of restatement firms, we find that auditor industry specialization reduces the likelihood of issuing restatements affecting core operating accounts, suggesting that industry specialization adds value in auditing a particularly critical area of the firms’ continuing operations. Finally, we find changing from a nonspecialist to a specialist auditor increases the likelihood of restatement, and changing from a specialist...

Corporate governance and disclosures on the transition to International Financial Reporting Standards

Abstract: For reporting periods ending on or after 30 June 2004, Australian companies were required to disclose the expected impact of applying Australian equivalents of International Financial Reporting Standards effective from 1 January 2005. The objective of this paper is to examine the association between the level of disclosure and corporate governance quality. Using a sample of listed companies with 30 June balance dates, we find that the quantity of disclosure was positively related to some aspects of superior corporate governance, such as the frequency of board and audit committee meetings and the choice of auditor.

Economic Incentives for Voluntary Reporting on Internal Risk Management and Control Systems

Abstract: This paper investigates managers' economic incentives for voluntary reporting on risk management and internal control using a sample of publicly traded firms in The Netherlands in the late 1990s. In this particular setting, internal control reporting was voluntary and covered a wide business‐based approach as defined in key internal control frameworks. We create an index to measure the extent of disclosure by identifying six reportable items related to internal control. Regarding managers' incentives to report, we hypothesize that voluntary disclosure increases with the extent of information and agency problems, as proxied by management and block holder ownership and financial leverage. Supporting our hypotheses, we find a negative relationship between the extent of internal control disclosure and management and block holder ownership, and positive relationship between the extent of disclosure and financial leverage. We interpret these findings as evidence for a conscious trade‐off by managers, which is l...

Internal Control Quality and Audit Pricing under the Sarbanes‐Oxley Act

Abstract: This paper extends prior research on audit risk adjustment by examining the association of audit pricing with problems in internal control over financial reporting, disclosed under Sections 404 and 302 of the Sarbanes‐Oxley Act [SOX]. While studies of auditors' responses to internal control risk provide mixed evidence, it is important to re‐examine this issue using data on specific client problems not available prior to SOX. As a baseline, we first establish a strong association of audit fees with internal control problems disclosed in the first year of implementation of Section 404, consistent with prior research (e.g., Raghunandan and Rama 2006). We then address two issues on which prior results are contradictory. In a broadly based sample of accelerated filers, we find that audit pricing for companies with internal control problems varies by problem severity, when severity is measured either as material weaknesses versus significant deficiencies, or by nature of the problem. Also, while audit fees incr...

The Auditor's Reporting Model: A Literature Overview and Research Synthesis

Abstract: This article examines academic research to contribute to the Public Company Accounting Oversight Board's (PCAOB) project on the auditor's reporting model. We develop a framework to organize our discussion of the literature in light of key questions raised at two Standing Advisory Group (SAG) meetings. We trace the historical development of the auditor's report and then delve into relevant research that focuses on the auditor's reporting decision and the content of the auditor's report. Throughout the article, we offer recommendations for future study. Last, we provide a brief recap and summarize the key findings.