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

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.

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

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-50001 ◽

2011 ◽

Vol 30 (2) ◽

pp. 51-76 ◽

Cited By ~ 16

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.

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

Accounting Horizons ◽

10.2308/horizons-18-101 ◽

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.

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Under Which Conditions are Whistleblowing “Best Practices” Best?

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-50451 ◽

2013 ◽

Vol 32 (3) ◽

pp. 171-181 ◽

Cited By ~ 15

Author(s):

Jian Zhang ◽

Kurt Pany ◽

Philip M. J. Reckers

Keyword(s):

Best Practices ◽

Audit Committees ◽

Behavioral Experiment ◽

Public Companies ◽

Anonymous Reporting ◽

Sarbanes Oxley ◽

Main Effect ◽

History Of ◽

Reporting Channel ◽

Reporting Intentions

SUMMARY: Public companies are required by the Sarbanes-Oxley Act of 2002 to establish an anonymous reporting (whistleblowing) channel for employee reporting of questionable accounting practices. Corporate audit committees are provided flexibility in implementing this requirement and a controversial choice is the type of reporting channel. Most commentators argue that “best practices” call for an externally administered “hotline.” To examine the efficacy of externally administered versus internally administered channels we conducted a behavioral experiment. Our results reveal a significant main effect with reporting intentions being greater if the hotline is administered externally. We then examine whether this finding is robust across selected environmental and employee-specific conditions and find that it is not. Our results suggest that the primary reporting benefits of an externally administered hotline are for organizations with a history of poor responsiveness to whistleblowing and for employees registering relatively low on the proactivity scale. Specifically, we find that an externally administered hotline obtains higher reporting intentions under conditions wherein a previous incidence of whistleblowing notably failed to achieve a good outcome. Also, this effect is only statistically significant for participants registering as relatively low on a “proactivity” scale.

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

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-50007 ◽

2011 ◽

Vol 30 (2) ◽

pp. 103-124 ◽

Cited By ~ 29

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.

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The Impact of Audit Committees on US Nonprofit Organizations’ Governance

JABM JOURNAL of ACCOUNTING - BUSINESS & MANAGEMENT ◽

10.31966/jabminternational.v27i1.560 ◽

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.

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

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-52560 ◽

2020 ◽

Vol 39 (1) ◽

pp. 173-197 ◽

Cited By ~ 2

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.

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The Impact on Auditor Judgments of CEO Influence on Audit Committee Independence

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-10146 ◽

2011 ◽

Vol 30 (4) ◽

pp. 129-147 ◽

Cited By ~ 46

Author(s):

Jeffrey R. Cohen ◽

Lisa Milici Gaynor ◽

Ganesh Krishnamoorthy ◽

Arnold M. Wright

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Audit Committee ◽

Data Availability ◽

Audit Committees ◽

Undue Influence ◽

Management Incentives ◽

Auditor Judgments ◽

The Impact ◽

Selection Of

SUMMARY Despite the importance of audit committee independence in ensuring the integrity of the financial reporting process, recent research suggests that even when audit committees meet regulatory independence requirements, certain factors, such as undue influence by the CEO over the selection of the audit committee, may diminish the ability of its members to be substantively independent. This study investigates whether auditors consider CEO influence over audit committee independence when making audit judgments where management's incentives to manage earnings differ. In an experiment, we find that audit partners and managers waive a larger amount of a proposed audit adjustment when management's incentives for earnings management are low than when incentives are high. However, when management incentives are high, auditors are less likely to waive as much of an adjustment when the CEO has less influence over the audit committee's independence than when the CEO's influence is greater. In all, the results support our expectations that auditors consider CEO influence on audit committee independence in the resolution of contentious accounting issues. Data Availability: Contact the authors.

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Clawback Provision of SOX, Financial Misstatements, and CEO Compensation Contracts

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x16686740 ◽

2017 ◽

Vol 34 (1) ◽

pp. 74-98 ◽

Cited By ~ 1

Author(s):

Ramachandran Natarajan ◽

Kenneth Zheng

Keyword(s):

Ceo Compensation ◽

Securities And Exchange Commission ◽

Money Stock ◽

Financial Reports ◽

Compensation Contracts ◽

Sarbanes Oxley ◽

Financial Misstatements ◽

Financial Misstatement ◽

The Impact ◽

To Receive

Section 304 of the Sarbanes-Oxley Act (hereafter, SOX), commonly known as the clawback provision, entitles the Securities and Exchange Commission (SEC) to sue the CEO and CFO in an attempt to recover their incentive compensation based on misstated financial reports. Although a stream of literature investigates the effects of voluntary firm-initiated clawback provisions, this study explores the effects of the mandatory SOX clawback provision on the likelihood of financial misstatements and CEO compensation. We find a significant decrease in the association between CEO in-the-money option value and the likelihood of a financial misstatement surrounding SOX, suggesting the SOX clawback provision has been effective in reducing financial misstatements arising from CEO in-the-money stock options. To examine the effects of the SOX clawback provision on CEO compensation, we identify a set of misstatement firms with a high restatement likelihood where the CEOs are most likely concerned with the impact of the SOX clawback provision on their compensation. We find that compared with control firms, these misstatement firms with a high restatement likelihood where the CEO is the chair of the board exhibit an increase in CEO salaries between the pre- and post-SOX periods, suggesting that in the post-SOX period, powerful CEOs are able to receive higher salaries which are not subject to the SOX clawback provision.

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