The Effect Of Auditor Independence On International Capital Markets For eCommerce Firms

According to the efficient market hypothesis, the market for securities can be described as efficient if the market reflects all available information and reacts quickly to new information (Schroeder and Clark 1998).  Investors depend on financial statements to help them judge opportunities, risks, and investment alternatives (Revsine, Collins and Johnson 1999).  This information must be verified by independent sources such as auditors.  The relationship between auditor and stockholder is based on agency theory (Schroeder and Clark 1998), where the agent (auditor) has a fiduciary relationship with the principle (stockholders).  Any loss of faith in auditor independence by investors will seriously affect the information value of financial statements. Auditor independence rules must be easy to understand and rigorously enforced or the public's confidence in financial statements will erode.  This paper will specifically assess the difficulties encountered by large accounting firms such as PriceWaterhouseCoopers (PWC) and Arthur Andersen  in their efforts to remain independent with respect to their e-commerce clients.  Many e-commerce companies have innovative and untested business models as well as inexperienced and untraditional business managers.  Some auditors fail to measure the risk associated with these intangible, knowledge-based attributes.  In addition, auditor independence may be blurred by the promise of lucrative consulting contracts.  According to Arthur Levitt, the Chair of the SEC in 1999: “The dynamic nature of today’s capital markets creates issues that increasingly move beyond the bright line of black and white.  New industries, spurred by new services and new technologies, are creating new questions and challenges that must be addressed.  Today, we are witnessing a broad shift from an industrial economy to a more service based one; a shift from bricks and mortar to technology and knowledge.” (Levitt 1999) The objective of this paper is to review current independence rules, assess the difficulty in maintaining independence in the current e-commerce environment, and to make suggestions for improving independence rules.  In addition, investigations conducted by the Securities and Exchange Commission (SEC) and new legislation such as the Sarbanes-Oxley Act will be reviewed as possible solutions to the problem.

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Auditor Independence: A Focus on the SEC Independence Rules

Issues in Accounting Education ◽

10.2308/iace.2008.23.2.247 ◽

2008 ◽

Vol 23 (2) ◽

pp. 247-260 ◽

Cited By ~ 3

Author(s):

Audrey A. Gramling ◽

Vassilios Karapanos

Keyword(s):

Audit Committee ◽

Financial Statements ◽

Auditor Independence ◽

Securities And Exchange Commission ◽

Background Information ◽

Instructional Resources ◽

Sarbanes Oxley ◽

Policy Goals ◽

Public Company ◽

Securities Laws

Auditor independence is an important underpinning of the federal securities laws. These laws require that registrants' financial statements filed with the Securities and Exchange Commission (SEC) be audited by independent public accountants. The focus on independence for public company auditors was increased in light of the requirements of the Sarbanes-Oxley Act of 2002 to strengthen auditor independence. These instructional resources provide background information on the current SEC auditor independence rules. After becoming familiar with these rules, you will have the opportunity to complete several case scenarios that address: (1) hypothetical settings that may represent violations of the SEC independence rules, (2) possible actions that an audit committee might take when it determines that the SEC independence rules may have been violated, and (3) possible alternatives to the current SEC independence rules that could achieve the desired public policy goals of objective audits and investor confidence.

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Public Accountants’ Perceptions Of The Acceptability Of Earnings Management Practices Through The Employment Of GAAP In The Post-Sox Period

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v26i1.277 ◽

2010 ◽

Vol 26 (1) ◽

Cited By ~ 1

Author(s):

John E. McEnroe

Keyword(s):

Earnings Management ◽

Management Practices ◽

Financial Statements ◽

Securities And Exchange Commission ◽

Font Size ◽

Generally Accepted Accounting Principles ◽

Sarbanes Oxley ◽

Accounting Scandals ◽

Audit Opinions ◽

Certification Requirements

Over fifteen years ago, Martens and McEnroe (1992) conducted a behavioral study involving earnings management through the use of Generally Accepted Accounting Principles (GAAP). Their findings indicated that auditors issued unqualified audit opinions on those financial statements and perceived little risk to litigation as a result. A decade later they conducted a similar study (Martens and McEnroe 2002) with the expectation that increased attention to earnings management by then chairman of the Securities and Exchange Commission (SEC), Arthur Levitt, would reduce auditors’ perceptions that the letter of GAAP is in itself an aegis or “safe harbor” against litigation. Although the authors found that auditors had become more conservative, they still issued unqualified opinions on financial statements in which transactions were reported in their form rather than their substance. Given the accounting scandals of Enron and WorldCom, among others, and the enactment of the Sarbanes-Oxley Act (SOX) in 2002, especially with its officers’ certification requirements, it was posited that auditors would exhibit a much more conservative approach than in either of the two previous studies. The results indicate that although auditors are more conservative than in the 1992 study, they still allow clients to engage in earnings management practices through the use of GAAP by issuing unqualified audit opinions on their financial statements.

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The Impact Of Sarbanes-Oxley Act

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v6i10.2479 ◽

2011 ◽

Vol 6 (10) ◽

Cited By ~ 3

Author(s):

Yousef Jahmani ◽

William A. Dowling

Keyword(s):

Financial Statements ◽

Public Confidence ◽

Font Size ◽

Sarbanes Oxley ◽

The Impact

The Sarbanes-Oxley Act (SOX) was signed into law in July 2002, with the express purpose of restoring public confidence in corporate financial statements. Prior to the enactment of Sox, investors suffered significant losses due to corporate failures brought on by financial malfeasance.

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A Review Of Going Concern Prediction Studies: 1976 To Present

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v5i5.2541 ◽

2011 ◽

Vol 5 (5) ◽

Cited By ~ 7

Author(s):

Jodi L. Bellovary ◽

Don E. Giacomino ◽

Michael D. Akers

Keyword(s):

Model Development ◽

Probit Analysis ◽

Securities And Exchange Commission ◽

Logit Analysis ◽

Font Size ◽

Primary Methods ◽

Going Concern ◽

Sarbanes Oxley ◽

Public Company ◽

Going Concern Opinion

In 1962, the Securities and Exchange Commission (SEC) was the first to address going concern issues with Accounting Series Release (ASR) No. 90.   Then, in 1963, the AICPA issued Statement on Auditing Procedures (SAP) No. 33, in response to ASR No. 90.  Both ASR No. 90 and SAP No. 33 addressed qualifications for issues that were unresolved and the results of which were indeterminable at the statement date. Soon after the issuance of Statement on Auditing Standards (SAS) No. 2 in 1974, researchers began to conduct studies on going concern issues.  This paper provides a comprehensive review of the literature on going concern studies and updates studies by Mutchler (1983) and Asare (1990) which provide detailed reviews of the evolution of the going concern report and requirements of the standards related to auditors' assessment of going concern.  Since SAS No. 2, the profession has not provided additional guidance on going concern.  Even the Sarbanes-Oxley Act of 2002 (SOX), makes no modifications to the requirements for considering going concern and the Public Company Accounting Oversight Board has not issued guidance addressing going concern. Starting with the first going concern prediction study [McKee, 1976], this paper identifies 27 models developed for predicting the going concern opinion and identifies the primary methods used for model development; multivariate discriminant analysis (MDA), logit analysis, probit analysis, and neural networks are.  This paper also identifies; the most popular type of focused model and identifies three non-U.S. firm models, the number of factors considered in any one study,  and the predictive abilities of the models. The paper also provides an annotated bibliography for the 27 models.

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Do Former Audit Firm Partners on Audit Committees Procure Greater Nonaudit Services from the Auditor?

The Accounting Review ◽

10.2308/accr-50271 ◽

2012 ◽

Vol 88 (1) ◽

pp. 297-326 ◽

Cited By ~ 31

Author(s):

Vic Naiker ◽

Divesh S. Sharma ◽

Vineeta D. Sharma

Keyword(s):

Audit Committee ◽

Auditor Independence ◽

Securities And Exchange Commission ◽

Data Availability ◽

Audit Committees ◽

Future Research ◽

Corporate Boards ◽

Audit Firm ◽

Sarbanes Oxley ◽

Nonaudit Services

ABSTRACT: To address potential threats to auditor independence, the Sarbanes-Oxley Act of 2002 (SOX) requires the audit committee to pre-approve nonaudit services (NAS) procured from the auditor. However, the presence of a former audit firm partner (FAP) affiliated with the current auditor on the audit committee could undermine the audit committee's due diligence over the NAS pre-approval process. To alleviate such concerns, the Securities and Exchange Commission approved a three-year “cooling-off” period for appointing audit firm alumni as independent directors. Our analyses show that the presence of both affiliated and unaffiliated FAPs on audit committees does not lead to greater NAS procured from the auditor; rather, FAPs reduce NAS procured from the auditor. Moreover, NAS decline significantly following the appointment of FAPs to the audit committee. Further tests suggest the three-year cooling-off period may not be warranted and deserves further investigation. Our study raises important implications for regulators, policy makers, corporate boards, and future research. Data Availability: Data are publicly available from sources identified in the text.

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Strong Corporate Governance and Audit Firm Rotation: Effects on Judges' Independence Perceptions and Litigation Judgments

Accounting Horizons ◽

10.2308/acch.2006.20.3.253 ◽

2006 ◽

Vol 20 (3) ◽

pp. 253-270 ◽

Cited By ~ 28

Author(s):

Marianne Moody Jennings ◽

Kurt J. Pany ◽

Philip M. J. Reckers

Keyword(s):

Corporate Governance ◽

Financial Statements ◽

Auditor Independence ◽

Corporate Board ◽

Auditor Liability ◽

Audit Firm ◽

Auditor Rotation ◽

Sarbanes Oxley ◽

Governance Environment ◽

Audit Firms

The Sarbanes-Oxley (SOX) legislation mandated modest threshold levels of corporate board independence and expertise, as well as audit partner (not firm) rotation. One objective was to create an environment supportive of enhanced actual and perceived auditor independence. This study examines whether perceptions of auditor independence and auditor liability are incrementally influenced by further strengthening corporate governance and by rotating audit firms. Our experimental study addresses these questions by analyzing responses of 49 judges attending a continuing education course at the National Judicial College. The experiment manipulates corporate governance at two levels (minimally compliant with current corporate governance requirements versus strong) and auditor rotation at two levels (partner rotation versus audit firm rotation). We find that strengthening corporate governance (beyond minimal SOX levels) and rotating audit firms (compared to partner rotation) lead to enhanced auditor independence perceptions. We also find that judges consider auditors less likely to be liable for fraudulently misstated financial statements when firm rotation is involved in a minimally compliant corporate governance environment.

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2002 Sarbanes-Oxley Act: Privately-Held Companies Implementation Issues

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v22i3.1423 ◽

2011 ◽

Vol 22 (3) ◽

Cited By ~ 1

Author(s):

Ronald O. Reed ◽

Thomas Buchman ◽

Richard Wobbekind

Keyword(s):

Internal Control ◽

Control Structure ◽

Cost Effective ◽

Financial Statements ◽

Font Size ◽

Regulatory Governance ◽

Sarbanes Oxley ◽

The Cost ◽

Code Of Professional Conduct ◽

Privately Held

Our research was designed to for two purposes: (1) if the provisions of SOX have merit on their own or whether it is just a mandate by legislators, and (2) to determine if privately-held companies currently not required to implement SOX have done so.  In summary, the respondents, who were experienced financial executives with knowledge of SOX and other regulatory governance policies see SOX as an influential piece of legislation.  They see some positive benefits to their organizations with implementation of some of the provisions of the act, such as better financing options, better credit opportunities, and opportunities to take the company public.  Many of financial executives indicated their organizations are implementing provisions in areas where it cost effective as well making “good” business sense.  For example, it is cost effective to implement a formal code of professional conduct for the executives and it does make good business sense.  However they are not asking their CEOs or CFOs to certify the accuracy of financial statements nor to the internal control structure.  Many of the financial managers indicated they are not implementing SOX on a full scale basis because of the cost, time, and that the lack of benefits derived from implementation.

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A Historical Assessment of a Key Auditor Independence Policy: Auditing Your Own Work

Accounting Historians Journal ◽

10.2308/aahj-19-011 ◽

2020 ◽

Vol 47 (2) ◽

pp. 11-20

Author(s):

John D. Keyser

Keyword(s):

Financial Statements ◽

Auditor Independence ◽

Securities And Exchange Commission ◽

Financial Information ◽

Financial Statement ◽

Accounting Profession ◽

The Subject

ABSTRACT In 1973, the AAA's Committee on Basic Auditing Concepts distinguished the respective roles of management and auditors (AAA 1973). Management is responsible to record, summarize, and communicate financial information to financial statement users. Auditors are responsible to communicate to users an opinion regarding the reliability of the financial information provided by management. The view of the Securities and Exchange Commission (SEC) regarding bookkeeping services, held since June 1940, is consistent with this division of responsibility. In contrast, the accounting profession took the position in 1949 that auditors can objectively audit financial statements with which they assisted in the preparation, and continues to hold that position to the present day. The evolution of these divergent positions regarding the respective roles of management and auditors is the subject of this paper.

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Changes To Accounting For Defined Benefit Postretirement Plans: Discussion And Illustration

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v23i2.1398 ◽

2011 ◽

Vol 23 (2) ◽

Author(s):

Norman H. Godwin ◽

Arlette C. Wilson

Keyword(s):

Accounting Standards ◽

Financial Statements ◽

Securities And Exchange Commission ◽

Financial Accounting ◽

Pension Benefit ◽

Defined Benefit ◽

Financial Accounting Standards Board ◽

Font Size

Requests that the Financial Accounting Standards Board (FASB) address issues related to employers’ accounting for defined benefit postretirement plans have increased in recent years.  Those requests have been made by users of financial statements and others, including the Securities and Exchange Commission (SEC) staff and representatives of the Pension Benefit Guaranty Corporation.  Constituents are interested in improved transparency and understandability.

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Regression Towards The Mean Versus Efficient Market Hypothesis: An Empirical Study

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v4i12.2723 ◽

2011 ◽

Vol 4 (12) ◽

Author(s):

H. Francis Bush ◽

Michael D. Canning

Keyword(s):

Empirical Study ◽

Market Efficiency ◽

Capital Markets ◽

Efficient Market Hypothesis ◽

Font Size ◽

Efficient Market ◽

The Mean ◽

Fortune Magazine ◽

Regression Towards The Mean

This study investigates the dominance of the statistical phenomenon, regression towards the means, against the market efficiency of capital markets.  Using Fortune Magazine’s ranking of America’s most admired companies to distinguish positive from negative firms, and using the Standard and Poor Index as a surrogate for market, the authors demonstrated that: (1) a portfolio of least admired forms will outperform a portfolio of most admired firms, (2) a portfolio of most admired firms will outperform the market, and (3) a portfolio of least admired firms will outperform the market.

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