Have You Seen…?
Sudip Bhattacharjee, Virginia Tech
Duane Brandon, Auburn University
Jennifer Mueller, Auburn University and
Reed Smith, Indiana University Purdue University Indianapolis
"Nonaudit Services and Earnings Conservatism: Is Auditor Independence Impaired?," by C. Ruddock, S. Taylor, and S. Taylor, Contemporary Accounting Research (Volume 23, Issue 3, 2006): 701-746.
This paper examines Australian firms in the 1990s to determine whether there is a negative link between conservatism and the provision of nonaudit services (NAS). The authors hypothesize that if independence is impaired by the provision of NAS, then the audit reports of firms with more NAS should demonstrate less earnings conservatism. The authors do not find such a link and conclude that independence was not in fact impaired by the provision of NAS during this period.
"Pricing of Initial Audit Engagements by Large and Small Audit Firms" by A. Ghosh and S. Lustgarten, Contemporary Accounting Research (Volume 23, Issue 2, 2006): 333 - 368.
Ghosh and Lustgarten investigate low-balling or "fee discounting" on initial audit engagements. They hypothesize and find that price competition is more intense among smaller audit firms. New clients account for a much larger proportion of the clients served by smaller firms than they do for larger firms. They argue that smaller firms are in a more competitive (atomistic) market that is more price sensitive, whereas the larger firms compete in a market that is oligopolistic and is thereby less price sensitive.
"Audit Qualifications of Income-Decreasing Accounting Choices," by F. Hodge, R. D. Martin, and J. H. Pratt, Contemporary Accounting Research (Volume 23, Issue 2, 2006): 369-394.
This study examines how qualifying an income-decreasing accounting change in years of strong financial performance affects financial report users' assessments of strategic reporting, current financial performance, and future financial performance. Using executives as financial statement users, the results indicate that that, without the qualification, users viewed the income-decreasing accounting change as relatively nonstrategic and assessments of current and future performance were not different. In the presence of the qualification, users believed that the accounting change was relatively strategic, and they discounted the income effect of the accounting change. In addition, assessments of future performance were below the assessments of current performance but no different from the assessments of future performance in the absence of the qualification.
"The stock market reaction to Ernst & Young's sale of its consulting unit to Cap Gemini" by C. Liu and S. Nabar, Managerial Auditing Journal (Volume 21, No. 9, 2006): 948-958.
The authors used an event study to investigate how the stock prices of Ernst & Young's (E&Y's) audit clients reacted to the sale of the accounting firm's consulting unit to Cap Gemini. The study is motivated by the debate on how the provision of non-audit services by auditors affects investor perceptions of auditor independence. Results indicate that E&Y client firms' mean and median abnormal stock returns are significantly positive for two events, the approval of the sale by E&Y's partners, and the approval of the transaction by Cap Gemini stockholders suggesting that investors view the separation of auditing and consulting favorably.
"Restoring Public Confidence in Capital Markets Through Auditor Rotation" by S. K. Gates, D. J. Lowe, and P. M. J. Reckers, Managerial Auditing Journal (Volume 22, No. 1, 2007): 5-1
The authors investigated the effect of firm rotation and/or audit partner rotation on individuals' confidence in the quality of audited financial statements. Results indicate that, even in an environment of strong controls for corporate governance, audit firm rotation incrementally influenced individuals' confidence in financial statements. However, audit partner rotation did not have a similar effect. The results suggest that rotating the audit firm will, contrary to GAO assumptions, better advance the goal to enhance auditor independence and audit quality and to restore investor confidence in the capital markets.
"Assurer Reputation for Competence in a Multiservice Context," by A. R. Ganguly, J. Herbold, and M. E. Peecher, Contemporary Accounting Research (Volume. 24, 2007): forthcoming.
This study examines determinants of reputation transferability and the durability of an assurer's flagship-service reputation in a multi-service context. Experimental findings indicate that reputation transferability increases when the new and flagship services require relatively similar, as opposed to relatively dissimilar, competencies. In addition, a new-service failure damages the flagship-service reputation only when the new and flagship services require relatively dissimilar, as opposed to relatively similar, competencies. Thus, greater similarity in the competencies required by a new and flagship service simultaneously enhances the transferability and durability of the assurer's flagship-service reputation.
"It's All About Audit Quality: Perspectives on Strategic-systems Auditing" by M. E. Peecher, R. Schwartz and I. Solomon, Accounting, Organizations and Society: In Press.
This paper describes the conceptual foundation and key elements of Strategic-Systems Auditing (SSA). The article illustrates facets of the process, including how the auditor, by acquiring a rich understanding of how and how well management is executing its business-model, develops rich (e.g., distributional) expectations of future financial-statement amounts and disclosures. These expectations form a benchmark against which the auditor later compares and investigates management's asserted financial-statement amounts and disclosures. The authors indicate that SSA first emerged in the 1990s as an attempt to enhance audit quality in response to changes in the audit environment. SSA continues to adapt to more recent environmental changes, especially society's demand for greater protection from financial-statement fraud.
"The Press as a Watchdog for Accounting Fraud," by G. Miller, Journal of Accounting Research (Volume 44, No. 5, 2006): 1001-1033.
The author investigates the press's role as a monitor or "watchdog" for accounting fraud. Findings show that the press fulfills this role by rebroadcasting information from other information intermediaries (analysts, auditors, and lawsuits) and by undertaking original investigation and analysis. Articles based on original analysis provide new information to the markets while those that rebroadcast allegations from other intermediaries do not. Consistent with a dual role for the press, the business-oriented press is more likely to undertake original analysis while nonbusiness periodicals focus primarily on rebroadcasting. The study also investigates determinates of press coverage, finding systematic biases in the types of firms and frauds for which articles are published. In general, the press covers firms and frauds that will be of interest to a broad set of readers and situations that are lower cost to identify and investigate.
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