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HAVE YOU SEEN…? Brad Reed “The Relationship between Board Characteristics and Voluntary Improvements in Audit Committee Composition and Experience,” by M. S. Beasley and S. E. Salterio, Contemporary Accounting Research (Vol. 18, No. 4, 2001): 539–570. This paper provides an empirical investigation regarding certain board of director characteristics and the extent that audit committee composition voluntarily exceeds minimum mandated levels and includes outside directors with financial reporting and audit committee knowledge and experience. The authors argue that such staffing decisions can directly affect the audit committee’s ability to monitor management’s financial-reporting process. The authors examine 627 Canadian firms and find that three board of director characteristics are associated with variation in audit committee characteristics. Firms are likely to voluntarily include more outsiders on their audit committees beyond the mandated minimum majority (1) as the proportion of outside director representation on the board of directors increases, (2) when firms segregate the board chairperson position from the CEO/president position, and (3) as board size increases. This paper provides the first large-scale evidence about the association between board composition, the segregation of the board chairperson and key management positions, and board size, with audit committee composition over and above mandated levels. “The Demand for Auditor Reputation across International Markets for Audit Services,” by N. Fargher, M. H. Taylor, and D. T. Simon, The International Journal of Accounting (Vol. 36, No. 4, 2001): 407–420. The authors of this study use a simultaneous-equations approach to examine both the supply and the demand for large-firm auditors across 20 different countries. The authors use simultaneous equations to account for the endogeneity between choice of auditor and audit fees. The study finds that disclosure characteristics are an important determinant of the choice of large-firm auditor. The demand for a large-firm auditor is positively related to the amount of disclosure in a given country. This study confirms previous findings that audit fees are higher in countries with higher litigation propensity and more extensive regulation. Additionally, the authors find that these previous results are unchanged when simultaneity of fees and auditor reputation is considered. “The Large Audit Firm Fee Premium: A Case of Selectivity Bias?” by J. C. Ireland and C. S. Lennox, Journal of Accounting Auditing & Finance (Vol. 17, No. 1, 2002): 73–91. This study provides an investigation of the finding of prior research that large (Big 5) audit firms earn significantly higher fees than small (non-Big 5) firms. The authors of this study note that prior research treats auditor choice as exogenous. However, the authors note that the auditor choice is not exogenous but rather endogenous. Specifically, the authors note that consistent with the signaling literature high-quality firms are simultaneously more likely to hire large audit firms and pay lower audit fees. The authors find that the effects of auditor selection bias on audit fees are statistically and economically significant. The authors find, consistent with analytical research, that large (small) audit firms experience advantageous (adverse) selection in attracting high (low) quality companies. The results of this study indicate the premium earned by large audit firms is more than twice as large when selectivity effects are taken into account (53.4 percent compared to 19.2 percent). “The Disciplinary Process of the Accounting Profession: Protecting the Public or the Profession? The Quebec Experience,” by J. Bédard, Journal of Accounting and Public Policy (Vol. 20, No. 4/5, 2001): 399–435. This paper examines the self-regulatory aspect of the accounting profession. Specifically the study examines the role of disciplinary activities of the profession in protecting the public interest in the Canadian province of Quebec, a jurisdiction where, although the profession is self-regulated, several rules are imposed by the government, including mandatory public participation and oversight by a regulatory agency. The paper examines two types of rule violations: private interest violations and public interest violations. Private interest is defined as the latent motivation of ethical codes to protect the interests of the accounting profession. Public interest is defined as regulation intended to protect the clients and third parties who place reliance on the pronouncements and advice of accountants. The author’s results indicate that at the trial stage, which is heavily regulated and where public participation is high, public-interest violations predominate, are considered more serious than private-interest violations, resulting in more severe sanctions. At the inquiry stage, which is characterized by a lower level of public involvement and a high degree of discretion, the results indicate that the decision of whether to prosecute a case depends on the cost of the disciplinary process, the notoriety of the case, and the risk that the case if prosecuted results in an acquittal. The author concludes from these results that the preponderance of the public interest over the private interest depends on the degree of regulation and public participation. “Auditor Reputation Building,” by B. Mayhew, Journal of Accounting Research (Vol. 39, No. 3, 2001): 599–617. The results of an experimental markets study examining auditor reputation building is presented in this paper. Using the auditor’s effort decision to proxy for the auditor’s reputation, the author finds that reputations form in all treatments that supply nearly immediate rewards to participants who adopt reputation equilibrium strategies, whereas reputation forms less than half the time when participants have to maintain reputation equilibrium strategies for a number of periods before the market rewards their efforts. The difference in the experimental results suggest that the speed in which auditors and managers are rewarded for pursuing reputation equilibrium strategies is a critical determinant of reputation formation. “Audit Quality, Management Ownership, and the Informativeness of Accounting Earnings,” by F. A. Gul, S. G. Lynn, and J. S. L. Tsui, Journal of Accounting, Auditing & Finance (Vol. 17, No. 1, 2002): 25–50. This study examines an auditor’s ability to moderate two findings of previous research: first, the association between informativeness of accounting earnings and management ownership, and second, whether audit quality moderates the negative association between management ownership and discretionary accruals. Using a sample of Australian firms, the authors find that the positive relationship between returns-earnings association and management ownership is significantly weaker for firms with Big 6 auditors. Also, the negative association between management ownership and discretionary accruals is weaker for firms with Big 6 auditors. The authors conclude that their findings are consistent with the theory that higher-quality audits can mitigate insiders’ incentives to exploit accounting-based contractual constraints and manage earnings as a result of the separation of ownership and control. “Evidence about Auditor-Client Management Negotiation Concerning Client’s Financial Reporting,” by M. Gibbins, S. Salterio, and A. Webb, Journal of Accounting Research (Vol. 39, No. 3, 2001): 535–563. In this paper, a negotiation process model is developed based on existing behavioral literature, but includes process elements and contextual accounting features expected to be observed in auditor-client negotiation settings. The authors utilize a questionnaire completed by 93 senior audit firm partners to support the model and provide evidence about the negotiation process between external auditors and client management concerning the client’s financial reporting. Results of the research indicate that accounting negotiation is deemed a normal part of auditing practice, can materially affect the financial statements, and involves a complex set of context sensitive features. “Misstatement Direction, Litigation Risk, and Planned Audit Investment,” by O. Barron, J. Pratt, and J. D. Stice, Journal of Accounting Research (Vol. 39, No. 3, 2001): 449–462. In an experiment that uses 102 audit managers and partners as participants, the authors find that unintentional overstatements give rise to higher assessments of litigation risk by auditors, as well as larger audit investments, than do unintentional understatements. The effect is larger in the presence of high litigation risk in the client’s industry. The results suggest that given an equal likelihood of understatement and overstatement error occurrence, the possibility of undetected understatement errors in audited financial statements is greater than the possibility of undetected overstatement errors. While the findings appear economically rational given the litigious auditing environment, the results of favoring the detection and correction of overstatements over understatements when they are equally likely is inconsistent with professional standards. “A Cascaded Inference Model for Evaluation of the Internal Audit Report,” by G. Krishnamoorthy, Decision Sciences (Vol. 32, No. 3, 2001): 499–512. A model is developed in this paper that provides a theoretical framework for how external auditors can evaluate the work of internal auditors. Using a cascaded inference framework to structure reliability assessments, attributes of source reliability (reliability of audit procedure, competence, and objectivity) are explicitly modeled and combined using Bayes’ rule to determine the inferential value of the internal auditor’s work. Results suggest that the inferential value of an internal audit report is highly sensitive to internal auditor reporting bias (i.e., propensity to misreport findings), but less sensitive to internal auditor reporting veracity (i.e., propensity to report truthfully). In addition, the author reports that the internal auditor reporting bias is conditional on the level of internal auditor competence, indicating a significant interaction between objectivity and competence factors. “Internalization versus Externalization of the Internal Audit Function: An Examination of Professional and Organizational Imperatives,” by L. Rittenberg and M. A. Covaleski, Accounting, Organizations and Society (Vol. 26, No. 7/8, 2001): 617–641. This paper examines the trend of outsourcing the internal audit function to public accountants and the professional turf war that has emerged between internal auditors and public accountants over internal audit services. The authors present a thorough review of the sociology of professions and outsourcing literature and develop two primary research propositions to investigate the conflict. The underlying premise is that public accounting firms attempt to re-define the boundaries of external and internal auditing to justify outsourcing, while internal audit departments attempt to re-affirm the boundaries between internal and external auditing to retain their provision for internal audit services. The authors then provide support for their propositions by examining internal and external auditing literature on the topic as well as the positions of professional accounting organizations (i.e., the IIA and AICPA). “The Contribution of Internal Audit as a Determinant of External Audit Fees and Factors Influencing this Contribution,” by W. L. Felix, Jr., A. A. Gramling, and M. Maletta, Journal of Accounting Research Vol. 39, No. 3, 2001): 513–534. In this paper, two regression models are developed and tested to expand the existent literature that investigates internal auditor contribution on external audits. Results from the first model, which examines the effect of internal auditor contribution on external audit fees, indicate a significant, negative association between the extent to which internal audit contributes to the financial statement audit and external audit fees. The second model examines factors that influence the extent to which internal audit contributes to the financial statement audit. Results of the second model suggest that internal audit contribution is significantly affected by internal audit quality and, depending on the level of inherent risk, both the availability of internal audit and the nature of the relationship between internal and external auditors. |