| Have You Seen...? Brad Reed, “Board Characteristics and Audit Fees,” by J. V. Carcello, D. R. Hermanson, T. L. Neal, and R. A. Riley, Contemporary Accounting Research (Vol. 19, No. 3, 2002): 365–384. This study
examines the relationship between three board characteristics (independence,
diligence, and expertise) and Big 6 audit fees for Fortune 1000 companies. To
protect its reputation capital, avoid legal liability, and promote shareholder
interests, a more independent, diligent, and expert board may demand
differentially higher audit quality than the Big 6 audit firms normally
provide. Because of the additional work required of the auditor, the audit fees
are expected to increase as the Board’s independence, diligence, and
expertise increase. The authors find significant positive relationships between
audit fees and board independence, diligence, and expertise. These results add
to the body of literature documenting relationships between corporate
governance mechanisms and various facets of the financial reporting and audit
processes. “Audit Review: Managers’ Interpersonal Expectations and Conduct of the Review,” by M. Gibbins and K. T. Trotman, Contemporary Accounting Research (Vol. 19, No. 3, 2002): 411–444. The authors of this paper present an interpersonal model of audit file reviews that is centered on the audit manager. The paper also presents a comprehensive field-based analysis of how a working paper review is conducted. The model shows that managers’ conduct of the review is affected by four components: the managers’ expectations of the client, expectations about the preparer, expectations about the partner, and managers’ own approach and circumstances. The authors find that the extent of review is sensitive to specific features of the client and the file (including risk factors), features of the preparer, and, in particular, the reviewer’s style. The evidence of managers’ awareness of preparers “stylizing” the file to suit the manager was weak, while the evidence of managers’ stylizing for the partners was pervasive, affecting both work performed and documentation. The authors also provide some descriptive evidence on the nature of the review process, including how frequently surprises are found in the review process. “The Market for External Audit Services in the Public Sector: An Empirical Analysis of NHS Trusts,” by M. A. Clatworthy, H. J. Mellett, and M. J. Peel, Journal of Business Finance & Accounting (Vol. 29, No. 9/10, 2002): 1399–1435. This paper extends research into the determinants of audit fees by investigating, for the first time, the market for audit services in U.K. National Health Service (NHS) trusts. A multivariate model of the determinants of trusts’ external audit fees is developed and augmented with reference to an analysis of private sector firms across a range of industrial sectors. The analysis finds that Big 6 auditors did not appear to be charging fee premiums. The analysis also demonstrates that, in common with private sector research, auditee size, location, and complexity were significant determinants of NHS trusts’ external audit fees. Also, the authors find that, in contrast to prior research, a significant negative relationship exists between audit and nonaudit fees. This negative relationship is consistent with the “knowledge spillover” hypothesis expressed in prior research. “Auditor Conservatism and Voluntary Disclosure: Evidence from the Year 2000 Systems Issue,” by P. M. Clarkson, C. Ferguson, and J. Hall, Accounting and Finance (Vol. 43, 2003): 21–40. The authors examine the disclosure level of Year 2000 remediation information in company annual reports to test the conservatism of Australian auditors. Annual reports for the 1998 reporting period were used because, at that time, Year 2000 remediation disclosure was completely voluntary. Among the explanatory variables used in the regression model to capture the Year 2000 disclosure were audit firm (Big 6 or not), company size, IT intensity, and level of corporate governance. The study finds that the extent of Year 2000 remediation disclosure made by companies with Big 6 auditors was greater than that made by non-Big 6 auditors. The authors argue that, because Big 6 auditors have greater reputation capital at stake, they are more likely to act conservatively and insist on increased Year 2000 remediation disclosure to reduce litigation risk. “Why Press Coverage of a Client Influences the Audit Opinion?” by J. R. Joe, Journal of Accounting Research (March 2003): 109–133. This study examines why auditors are more likely to issue going-concern (GC) opinions to clients when the clients have been subjected to negative press coverage prior to the audit opinion date. Prior studies suggest that the increased likelihood of a GC opinion associated with negative press, which is arguably redundant information, is attributable to auditors’ conservatism and efforts to minimize litigation risk. This study uses an experiment to test the above explanation (called the “strategic” explanation) as well as whether the negative information affects the auditors’ cognition via the saliency of the redundant, negative press coverage. Using 90 in-charge auditors, the author tests how press coverage of loan default information (present or not) impacts the auditors’ viability choices (continue or fail), GC probability, opinion choice, and perceived litigation risk. The findings suggest that cognition plays a significant role in auditors’ opinion choice; specifically, the redundant information influenced auditors’ beliefs about the company’s viability while the auditors’ perceived litigation risk remained constant. “Shredded Reputation: The Cost of Audit Failure,” by P. K. Chaney and K. L. Philipich, Journal of Accounting Research (September 2002): 1221–1245. By examining the market reactions to significant events related to the Enron debacle, the authors were able to test how the events affected Arthur Andersen’s audit reputation. A key finding was that Andersen’s admission to having shredded documents related to Enron had a significant negative effect on the stock prices of Andersen’s other clients. In addition, the reaction was more severe for clients from Andersen’s Houston office. The authors argue that the market reaction was a reflection of Andersen’s loss of reputation. However, the study did not show that Andersen’s overall independence, as measured by the amount of audit or nonaudit fees charged to its clients, was impaired. “Auditors’ Conflict Management Styles: An Exploratory Study,” by J. Goodwin, ABACUS 38 (2002): 378–405. In this exploratory study, the author identifies the conflict management styles of audit partners and managers. Two variables are manipulated, the size of the client and strength of the company’s corporate governance mechanisms, to capture the conflict management style of auditors in a dispute with a company’s finance director concerning the valuation of inventory. Participants primarily used an integrating style (open exchange of information to achieve an outcome agreeable to both parties, and thus a win-win situation) to resolve disputes. Compromising (both parties give something up to achieve a mutually acceptable decision, and thus a no-win, no-lose situation) and dominating (desire to impose one’s views on the other party, and thus a win-lose situation) styles were used to a lesser extent. Client size and corporate governance had a relatively minor impact on auditors’ choice of styles. “Do Non-Audit Service Fees Impair Auditor Independence? Evidence from Going Concern Audit Opinions,” by M. L. DeFond, K. Raghunandan, and K. R. Subramanyam, Journal of Accounting Research (September 2002): 1247–1274. This paper tests the association between nonaudit (and audit) fees paid to incumbent auditors and auditor independence by investigating the auditors’ willingness to issue going-concern (GC) opinions. The authors argue that the GC opinion proxies for independence because issuing a GC opinion means that the auditor is objectively evaluating the firm’s performance and is able to withstand client pressure to issue a clean opinion. Based on a sample of 1,158 distressed firms, the results indicate no evidence of a significant association between the auditor’s propensity to issue a GC opinion and either total fees or audit fees. “Multiple Hypothesis Evaluation in Auditing,” by R. P. Srivastave, A. Wright, and T. J. Mock, Accounting and Finance (Vol. 42, 2002): 251–277. This paper presents a model, derived from probability theory, that examines the appropriate revision of likelihoods for multiple hypotheses given different audit conditions. The framework indicates that probability revisions should vary substantially under alternative audit scenarios. Specifically, the authors focus on the process of assessing the most likely cause(s) of account fluctuations in four scenarios: (1) mutually exclusive and collectively exhaustive; (2) mutually exclusive and nonexhaustive; (3) nonexclusive and nonexhaustive hypotheses with positive correlations; and (4) nonexhaustive with mixed correlations (positive, negative, and independent). The paper concludes with the development of testable hypotheses and avenues for future research. |