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Troy Hyatt, University of Northern Iowa, and Mark Taylor, University of Nebraska

“An Investigation of Investor Reaction to the Information Content of a Going-Concern Audit Report While Controlling for Concurrent Financial Statement Disclosure,” by S. J. Carlson, G. W. Glezen, and M. E. Benefield, Quarterly Journal of Business and Economics (Vol. 37, No. 3, 1998): 25–39.

Noting that previous event studies of the information content of going-concern audit reports (GCAR) have not attempted to control for concurrent financial information disclosures, this study uses analysis of covariance (ANCOVA) to control for more concurrent financial information disclosures relative to previous studies. The authors analyze 88 firms that received GCARs against an equal number of control firms matched by fiscal year, industry and a measure of financial distress. The study employs individual security return as the dependent variable and an indicator variable representing the presence or absence of a GCAR as the independent variable of interest. Covariates consist of variables representing unexpected earnings, market returns, size and five financial ratios representing financial statement information. The authors report that during the event period the difference in adjusted means for the GCAR and non-GCAR groups is significant. These results suggest that financial statement readers find a GCAR useful for firm valuation purposes.

“Organizational Levels and Perceived Importance of Attributes for Superior Audit Performance,” by H. Tan, ABACUS (Vol. 5, No. 1, 1999): 77–90.

This article examines the attributes considered to be important for superior performance as an auditor and the changing importance of these attributes at different levels of the firm. It also investigates whether auditors are aware of the relative importance of these attributes. Auditors from three Big 6 firms provided responses on the relative importance of various attributes for superior performance. The results indicate variation in the relative importance of these attributes across different organizational levels. For example, some attributes that were deemed important at lower ranks were considered less important at higher ranks, and vice versa. In addition, the results suggest that auditors generally have low to moderate levels of awareness of the relative importance of the 20 attributes analyzed in the study and considered to be important for superior performance as an auditor.

“The Effect of Audit Seniors’ Decisions on Working Paper Documentation and on Partners’ Decisions,” by D. N. Ricchiute, Accounting, Organizations and Society (Vol. 24, No. 2, 1999): 155–171.

This study reports on previous research that indicates that the memories of working-paper preparers may be biased toward evidence consistent with their prior decisions, but that reviewers exposed to the same set of evidence can mitigate the bias by evaluating inconsistent evidence. In this study, the author tests whether audit seniors’ decisions bias their ability to recognize evidence to document in working papers, and whether biased documentation affects the decisions of audit partners who are exposed only to the subset of evidence that seniors recognize and document. The first experiment confirms that audit seniors’ prior decisions bias their memories for evidence to document in working papers, and also creates materials for the second experiment. The second experiment offers a new insight: when exposed only to the evidence that seniors recognize and document, partners make decisions biased in the direction of the seniors’ decisions, since not all of the inconsistent evidence is documented. Experimental procedures controlled for four alternative interpretations: justification, evidence order, recency and primacy.

“Bias and Accuracy of Management Earnings Forecasts: An Evaluation of the Impact of Auditing,” by B. J. McConomy, Contemporary Accounting Research (Vol. 15, No. 2, 1998): 167–195.

This paper assesses how the bias and accuracy of managers’ earnings forecasts in prospectuses were affected by a 1989 regulation that required the forecasts to be audited by public accountants. Theory suggests that auditors’ association with the forecasts would reduce positive (optimistic) bias by reducing moral hazard. Regulators expected that the audit requirement would also improve the accuracy of the forecasts. Both predictions were tested using management earnings forecasts disclosed in prospectuses of Canadian initial public offerings. The results show that audited forecasts contained significantly less positive bias than reviewed forecasts, but there was only a marginally significant improvement in accuracy.

“Setting Tolerable Misstatements When Auditing Aggregated Accounts,” by O. Barron, S. M. Groomer, and M. Swink, Decision Sciences (Vol. 29, No. 4): 1005–1033.

As generally accepted auditing standards require auditors to plan audits of clients’ account balances, tolerable misstatement amounts must be established for each account that will be sampled. This article presents a remedy to the perceived difficulties associated with classical sampling approaches, which have not been widely used in audit practice. The solution is an efficient, easily implementable optimal solution method for the problem of setting tolerable misstatements in the presence of constraints on tolerable misstatements for individual accounts as well as for the overall audit. The authors’ method suggests when the materialities of certain accounts or the materiality of the overall audit are irrelevant to the problem. The authors provide several examples, which demonstrate the method’s solution approach and the settings in which the approach proves more effective or more efficient than that provided by monetary unit sampling.

“A Note on Going-Concern Modified Audit Reports and Subsequent Bankruptcies Before and After SAS No. 59,” by M. A. Geiger, K. Raghunandan, and D. V. Rama, Accounting Enquiries (Vol. 8, No. 1): 1–34.

In contrast to previous papers that have examined the proportion of bankrupt companies which did not receive going-concern modified audit reports (a Type II reporting error), this paper examines the subsequent viability status for companies that received a first-time going-concern modified audit report (Type I reporting errors) before and after SAS No. 59. The results show that 13.6 percent and 24.3 percent of companies that received a first-time going-concern modified audit report in the post-SAS No. 59 period entered bankruptcy within one year and two years, respectively. They also showed that only 10.1 percent and 20.2 percent of companies receiving a first-time going-concern modified report in the pre-SAS No. 59 period entered bankruptcy within one year and two years, respectively. After controlling for financial stress and company size, the authors find that differences in the proportions of companies with first-time going-concern modified audit reports filing for bankruptcy before and after SAS No. 59, in both the one-year and two-year time frames, are not statistically significant.

“An Examination of the Auditing Standards Promulgation Process Involving SAS No. 69,” by J. E. McEnroe and S. C. Martens, Journal of Accounting and Public Policy (Vol. 17, 1998): 1–26.

This paper examines the development of Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles in the Independent Auditor’s Report. The authors reviewed all of the comment letters to the exposure draft of the SAS to attempt to assess whether there are certain biases present in the standard-setting process. Specifically, the authors wanted to determine whether certain organizations’ comments (proposed modifications to the SAS) were more likely to be integrated into the final Statement than others. Results did not support the following propositions: (1) comments from large CPA firms are more likely to be integrated than comments from smaller CPA firms; (2) comments from an organization having a partner or employee who is a current ASB member are more likely to be integrated than comments from organizations that do not have a current ASB member; and (3) comments from state auditors are more likely to be integrated than comments from other sources. However, results did support the thesis that comments from an organization outside the AICPA whose domain of control was threatened by the proposed SAS (the FASB, GASB and the National State Auditors Association) are more likely to be integrated than comments from organizations whose domain of control was not threatened.

“Competition in Auditing: Evidence from Entry, Exit, and Market Share Mobility in Germany versus The Netherlands,” by W. F. J. Buijink, S. J. Maijoor, and R. H. G. Meuwissen, Contemporary Accounting Research (Vol. 15, No. 3): 385–404.

The primary purpose of this paper is to document some dynamic characteristics of two audit markets, which have distinct regulatory regimes, and to use these characteristics to evaluate the audit market competition in these markets. The characteristics examined are audit market share mobility (defined as the amount of market share switching between audit firms for a given period of time), audit firm entry and audit firm exit. The audit markets compared are the more regulated German market and the more liberal Dutch market. The data used in the study includes all firms active in the two audit markets in the period 1970 to 1994. Results indicate that although the Dutch market is more concentrated than the German market, the Dutch market also has higher market share mobility, higher audit firm entry and higher audit firm exit. The results also hold when the analysis is restricted to only the largest audit firms. As a result, this study’s findings suggest that high levels of concentration do not necessarily indicate limited competition.

“An Analysis of the Economic Consequences of the Proportionate Liability Rule,” by D. K. Chan and S. Pae, Contemporary Accounting Research (Vol. 15, No. 4): 457–480.

The purpose of this paper is to present a theoretical model to analyze the economic consequences of a change from joint and several liability to proportionate liability in litigation involving public accountants. The large public accounting firms, in reaction to the litigation explosion they faced, issued a Statement of Position in 1992 calling for a replacement of joint and several liability with proportionate liability, and the Private Securities Litigation Reform Act of 1995 did just that. The authors examine the incentive effects of proportionate liability on both the auditor’s effort decision and the financial statement users’ litigation decision. The authors’ analysis demonstrates that replacing joint and several liability with proportionate liability decreases, under certain conditions, the equilibrium audit effort, the probability of litigation, the market price of the firm and audit fees. However, even though proportionate liability reduces the equilibrium audit effort, the authors also demonstrate that it can increase aggregate social welfare.

“An Examination of Factors Affecting Audit Practice Development,” by J. R. Cohen and G. M. Trompeter, Contemporary Accounting Research (Vol. 15, No. 4): 481–504.

This paper reports the results of an experiment designed to examine the effect of certain practice development factors on auditors’ acceptance/retention decisions and financial reporting judgments. The two practice development factors investigated are as follows: (1) existing vs. potential client and (2) a more vs. less aggressive (with respect to practice development issues) engagement partner. Seventy-four audit managers from two Big 6 firms participated in the study. The case used in the experiment described a (potential) client who was proposing a relatively aggressive position with respect to accounting for research and development costs. After reading the case materials, the manager participants were asked, among other things, to indicate how much effort they believed should be expended in attempting to obtain (or keep) the client and whether they would recommend accepting the (potential) client’s position on the accounting for research and development costs. Results indicate that both the type of client (current or potential) and the type of partner (more or less aggressive) significantly affected the auditors’ judgments. Specifically, subjects in the current client condition, as well as those in the more aggressive partner condition, were more likely to recommend expending effort to obtain (or keep) the client. In addition, subjects who were willing to expend more effort to obtain (or keep) the client and those in the more aggressive partner condition were more likely to recommend accepting the client’s accounting position with respect to research and development costs.

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