Does Mandated Disclosure Induce a Structural Change in the Determinants of Nonaudit Service Purchases?

2011 ◽  
Vol 30 (2) ◽  
pp. 51-76 ◽  
Author(s):  
Lawrence J. Abbott ◽  
Susan Parker, and ◽  
Gary F. Peters
Keyword(s):  
Structural Changes ◽  
Agency Cost ◽  
Auditor Independence ◽  
Securities And Exchange Commission ◽  
Data Availability ◽  
Audit Committees ◽  
Managerial Ownership ◽  
Market Responses ◽  
Sarbanes Oxley ◽  
The Impact

SUMMARY We investigate the association between mandated fee disclosures and structural changes in the determinants of nonaudit services (NAS). The Securities and Exchange Commission (SEC) underscored the importance of understanding the impact of disclosures when the Auditor Independence Rules of 2000 explicitly relied on market responses to discipline NAS purchases. In contrast, the Sarbanes-Oxley Act of 2002 (SOX) relied upon prohibitions of NAS. Our findings suggest that market-based approaches were functioning prior to SOX prohibitions. We find that after the SEC mandated fee disclosures, NAS purchases become negatively associated with firms seeking financing and positively associated with managerial ownership. We also document a significantly smaller propensity for NAS purchases among larger firms, compared to a nondisclosure environment. Last, we find that mandated disclosures significantly increase the negative association between NAS purchases and effective audit committees. Collectively, our findings are consistent with mandated disclosures increasing agency cost incentives for limiting NAS purchases. Data Availability: The data are available from public sources.

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

2012 ◽  
Vol 88 (1) ◽  
pp. 297-326 ◽  
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.

The Effect of Evidence Strength and Internal Rewards on Intentions to Report Fraud in the Dodd-Frank Regulatory Environment

2013 ◽  
Vol 32 (3) ◽  
pp. 87-104 ◽  
Author(s):  
Alisa G. Brink ◽  
D. Jordan Lowe ◽  
Lisa M. Victoravich
Keyword(s):  
Securities And Exchange Commission ◽  
Data Availability ◽  
Audit Committees ◽  
Monetary Incentives ◽  
Sarbanes Oxley ◽  
Evidence Strength ◽  
Internal Whistleblowing ◽  
The Impact ◽  
Internal Incentive ◽  
Reporting Intentions

SUMMARY: There are many unanswered questions and concerns regarding the consequences of the fraud whistleblowing environment created by the Sarbanes-Oxley (SOX) and Dodd-Frank Acts. While SOX requires audit committees to implement anonymous internal reporting channels, the Dodd-Frank Act offers substantial monetary incentives that encourage reporting to the Securities and Exchange Commission (SEC). To mitigate concerns that employees might bypass internal channels, some companies are considering offering internal whistleblowing incentives. However, it is unclear how internal incentives will affect employee whistleblowing behavior. We experimentally examine the impact of an internal incentive on employees' intentions to report fraud. Across treatments, we find a greater likelihood of reporting internally than to the SEC. Evidence strength interacts with the presence of an internal incentive such that SEC reporting intentions are greatest when evidence is strong and an internal incentive is present. When evidence is weak, the presence of an internal incentive decreases SEC reporting intentions. Data Availability: Data used in this study are available from the authors upon request.

Strategic Audit Inquiry: The Impact of Timing and the Promotion of Statutory Protections on Client Fraud Disclosures

2020 ◽  
Vol 34 (3) ◽  
pp. 153-167
Author(s):  
John R. Lauck ◽  
Stephen J. Perreault ◽  
Joseph R. Rakestraw ◽  
James S. Wainberg
Keyword(s):  
Best Practices ◽  
Audit Quality ◽  
Self Regulation ◽  
Data Availability ◽  
Audit Committees ◽  
External Auditors ◽  
Extant Literature ◽  
Psychological Theories ◽  
Inquiry Process ◽  
The Impact

SYNOPSIS Auditing standards require external auditors to inquire of client-employees regarding their knowledge of actual or suspected fraud (PCAOB 2010b; AICPA 2016). However, the extant literature provides little guidance on practical methods that auditors can employ to increase the likelihood of fraud disclosure and improve audit quality. Drawing upon best practices in the whistleblowing literature and psychological theories on self-regulation, we experimentally test the efficacy of two practical strategies that auditors can employ during the fraud inquiry process: actively promoting statutory whistleblower protections and strategically timing their fraud inquiries. Our results indicate that auditors are more likely to elicit client-employee fraud disclosures by actively promoting statutory whistleblower protections and strategically timing the fraud inquiry to take place in the afternoon, when client-employee self-regulation is more likely to be depleted. These two audit inquiry strategies should be of considerable interest to audit practitioners, audit committees, and those concerned with improving audit quality. Data Availability: From the authors by request.

How does ownership structure affect the financing and dividend decisions of firm?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Tahar Tayachi ◽  
Ahmed Imran Hunjra ◽  
Kirsten Jones ◽  
Rashid Mehmood ◽  
Mamdouh Abdulaziz Saleh Al-Faryan
Keyword(s):  
Ownership Structure ◽  
Dividend Policy ◽  
Generalized Method Of Moments ◽  
Institutional Ownership ◽  
Agency Cost ◽  
Debt Financing ◽  
Policy Implications ◽  
Managerial Ownership ◽  
Content Type ◽  
The Impact

Purpose Ownership structure deals with internal corporate governance mechanism, which plays important role in minimizing conflict of interests between shareholders and management Ownership structure is an important mechanism that influences the value of firm, financing and dividend decisions. This paper aims to examine the impact of the ownership structures, i.e. managerial ownership, institutional ownership on financing and dividend policy. Design/methodology/approach The authors use panel data of manufacturing firms from both developed and developing countries, and the generalized method of moments (GMM) is applied to analyze the results. The authors collect the data from DataStream for the period of 2010 to 2019. Findings The authors find that managerial ownership and ownership concentration have significant and positive effects on debt financing, but they have significant and negative effects on dividend policy. Institutional ownership shows a positive impact on financing decisions and dividend policy for sample firms. Originality/value This study fills the gap by proving the policy implications for both firms and investors, as managers prefer debt financing, but at the same time try to ignore dividend payment. Therefore, investors may not invest in firms with a higher proportion of managerial ownership and may choose to invest more in institutional ownership, which lowers the agency cost.

The Impact of Client and Misstatement Characteristics on the Disposition of Proposed Audit Adjustments

2011 ◽  
Vol 30 (2) ◽  
pp. 103-124 ◽  
Author(s):  
Jennifer Joe ◽  
Arnold Wright, and ◽  
Sally Wright
Keyword(s):  
Financial Reporting ◽  
Internal Controls ◽  
Data Availability ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Time Period ◽  
Confidentiality Agreement ◽  
Financial Scandals ◽  
The Impact

SUMMARY We present evidence on the resolution of proposed audit adjustments during a unique time period, immediately following several U.S. financial scandals and surrounding calls for reforms in auditing and financial reporting, which culminated in the passage of the Sarbanes-Oxley Act (SOX). During this period, auditors and their clients faced increased scrutiny from investors and regulators. In addition, auditors had to contend with changed incentives, a new external regulator (i.e., the PCAOB), and upcoming annual PCAOB inspections. We extend prior studies by considering a broader range of factors potentially impacting the resolution of proposed adjustments, including the effect of client tenure, strength of internal controls, and repeat adjustments. Data on 458 proposed adjustments are obtained from the working papers of a sample of 163 audit engagements conducted during 2002 by a Big 4 firm. We find that 24.2 percent of proposed adjustments were subsequently waived. The results indicate audit adjustments are more likely to be waived for clients with whom the audit firm has had a longer relationship, although the pattern does not reflect favoring such clients. We also find that adjustments are more likely to be waived for repeat adjustments. Data Availability: Due to a confidentiality agreement with the participating audit firm the data are proprietary.

scholarly journals The Impact of Audit Committees on US Nonprofit Organizations’ Governance

2020 ◽  
Vol 27 (1) ◽  
pp. 30
Author(s):  
Husam Abu-Khadra
Keyword(s):  
Nonprofit Organizations ◽  
Audit Committee ◽  
Nonprofit Sector ◽  
The United States ◽  
Preliminary Evidence ◽  
Securities And Exchange Commission ◽  
Audit Committees ◽  
Public Companies ◽  
Policy Makers ◽  
The Impact

All public companies in the United States are required by the securities and exchange commission (SEC) to have an audit committee. Such enforcement can be attributed to high-profile corporate failures and their connections to nonexistence, ineffective or weak audit committees and governance. Despite the efforts to establish a similar argument and enforcement structure for the nonprofit sector, the internal revenue service (IRS) has not pursued legislation, and no empirical evidence has been established to support any public policy changes. This paper contributes to the literature in this field by being the first study to examine 124,980 nonprofit organizations during the period of 2010 to 2015 to test the association between governance in nonprofit organizations and audit committees. We included fifteen measures from these organizations’ IRS Form 990 filings to formulate the study variables. We found significant evidence that the existence of audit committees improves the governance scores of nonprofit organizations. Our study findings have significant implications for nonprofit executives, policy makers and any other interested parties; these findings act as preliminary evidence to support more proactive policies regarding mandatory audit committees for nonprofit organizations. 

Auditor Independence: A Focus on the SEC Independence Rules

2008 ◽  
Vol 23 (2) ◽  
pp. 247-260 ◽  
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.

Who's Really in Charge? Audit Committee versus CFO Power and Audit Fees

2014 ◽  
Vol 89 (6) ◽  
pp. 2057-2085 ◽  
Author(s):  
Matthew J. Beck ◽  
Elaine G. Mauldin
Keyword(s):  
Audit Committee ◽  
Economic Recession ◽  
Audit Fees ◽  
Auditor Independence ◽  
Negotiation Process ◽  
Data Availability ◽  
Audit Committees ◽  
Exogenous Shock ◽  
Cast Doubt ◽  
Recent Financial Crisis

ABSTRACT Although regulation makes audit committees responsible for determining and negotiating audit fees, researchers and practitioners express concerns that CFOs continue to control these negotiations. Thus, regulation may give investors a false sense of security regarding auditor independence. We utilize the recent financial crisis and economic recession as an exogenous shock that allows us to shed light on the relative influence of the audit committee and the CFO on fee negotiations. During the recession, we find larger fee reductions in the presence of more powerful CFOs, and smaller fee reductions in the presence of more powerful audit committees. We also find the CFO or the audit committee primarily influences fees when their counterpart is less powerful. Our findings suggest a more complex relationship between the CFO and the audit committee than current regulations recognize and cast doubt on the ability of regulation to force one structure on the negotiation process. Data Availability: Data are available from public sources identified in the text.

scholarly journals Do Gender Diversity Recommendations in Corporate Governance Codes Matter? Evidence from Audit Committees

2020 ◽  
Vol 39 (1) ◽  
pp. 173-197 ◽  
Author(s):  
Nigar Sultana ◽  
Steven F. Cahan ◽  
Asheq Rahman
Keyword(s):  
Audit Committee ◽  
Audit Quality ◽  
Gender Diversity ◽  
Positive Association ◽  
Data Availability ◽  
Audit Committees ◽  
Women Directors ◽  
Corporate Governance Codes ◽  
Limited Supply ◽  
The Impact

SUMMARY Motivated by two opposing views, the limited supply view and the discrimination view, we examine the impact of gender diversity guidelines on the strength of the association between the presence of female audit committee members and audit quality. The limited supply view predicts that the effect of female audit committee members on audit quality would decrease after the guidelines were issued because they increased the demand for women directors without a commensurate increase in the supply of qualified women directors. The discrimination view predicts this relation would increase after the guidelines were issued since some firms would have abandoned their suboptimal hiring practices that favored men over better qualified women, resulting in higher quality firm-director matches as opportunities for women increase. Consistent with the limited supply view, we find that the positive association between audit committee gender diversity and audit quality weakened after gender diversity guidelines were introduced in Australia. JEL Classifications: G38; M42; M48. Data Availability: Data are available from the databases cited in the text.

Does client industry importance affect auditor independence?

2019 ◽  
Vol 35 (4) ◽  
pp. 575-595
Author(s):  
Qiang Cao ◽  
Nanwei Hu ◽  
Lizhong Hao
Keyword(s):  
Design Methodology ◽  
Discretionary Accruals ◽  
Auditor Independence ◽  
Data Availability ◽  
Research Setting ◽  
Difference Model ◽  
Limited Sample ◽  
Content Type ◽  
Audit Firm ◽  
The Impact

Purpose The purpose of this paper is to examine whether client industry importance affects auditor independence. Design/methodology/approach This study analyzes audit firm merger data from China Stock Market and Accounting Research and uses a difference-in-difference model to find whether client industry importance is associated with auditor independence. This study uses discretionary accruals and propensity to issue modified audit opinions as proxies for auditor independence. Findings Results show that the greater the decline in client industry importance, the more significant the increase in auditor independence. In addition, the magnitude of decline in client overall importance is also positively associated with the extent of increase in auditor independence; however, this result disappears after controlling for client industry importance. Research limitations/implications The authors acknowledge that this study has limitations. First, audit firm mergers provide a unique research setting. However, the findings of this study in such setting may not be generalizable to other situations. Second, this study has a limited sample size because of data availability, which could impact the robustness of the results. Originality/value Results from this study are important because investors and regulators have increasing concerns over auditor independence since the Enron scandal. To the best of the authors’ knowledge, this study is the first to examine the impact of client industry importance on auditor independence and in a unique setting of audit firm merger to separate auditor independence from auditor competence, and hence controlling for self-selection bias. Results of this study provide evidence that client industry importance has significant influence over auditor independence.

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