Does the JOBS Act Reduce Compliance Costs of Emerging Growth Companies? Theory and Evidence

2019 ◽  
Vol 38 (4) ◽  
pp. 151-175
Author(s):  
Inder K. Khurana ◽  
Lei Zhao
Keyword(s):  
Initial Public Offering ◽  
Financial Reporting ◽  
Internal Control ◽  
Small Firms ◽  
Audit Fees ◽  
Significant Cost ◽  
Compliance Costs ◽  
Disclosure Requirements ◽  
Public Offering ◽  
Jobs Act

SUMMARY In April 2012, the Jumpstart Our Business Startups (JOBS) Act was enacted to revitalize the initial public offering market by reducing regulatory burdens for small firms. We focus on audit fees, one directly observable and significant cost of complying with the JOBS Act. Specifically, we examine whether the exemption of emerging growth companies (EGCs) from SOX 404(b) auditor attestations of internal control over financial reporting and other disclosure requirements affected audit fees paid by EGCs. We find that EGCs paid higher audit fees than non-EGCs after IPOs. Moreover, we find that the positive relation between EGCs and audit fees is more pronounced for firms with high financial reporting risk. Collectively, our results reveal an unintended consequence of the JOBS Act: it failed to reduce audit fees, a major component of the compliance costs of EGCs.

Alibaba Group Initial Public Offering: A Case Study of Financial Reporting Issues

2016 ◽  
Vol 31 (4) ◽  
pp. 449-460 ◽  
Author(s):  
Qing L. Burke ◽  
Tim V. Eaton
Keyword(s):  
New York ◽  
Initial Public Offering ◽  
Financial Reporting ◽  
Stock Exchange ◽  
Financial Accounting ◽  
Learning Needs ◽  
York Stock Exchange ◽  
Accounting Courses ◽  
Chinese Company ◽  
Public Offering

ABSTRACT In September 2014, the Chinese e-commerce giant Alibaba Group Holding Limited issued shares on the New York Stock Exchange, making it the world's largest initial public offering. This case examines different aspects of the Alibaba Group's initial public offering, including Alibaba Group's business model, financial reporting and corporate governance, as well as the macroeconomic, political, and legal environment in which the company operates. In addition, this case will familiarize students with the risks and opportunities for Chinese companies and investors when a Chinese company lists in the U.S. This case is suitable for financial accounting and international accounting courses at the intermediate and advanced levels for undergraduates as well as graduate students. The case is scalable, and instructors can choose from multiple sections of the case and different case questions to tailor the case difficulty to their students' learning needs.

Jones Enterprises Real Estate Investment Trust: Comparing U.S. and Canadian Acquisition Accounting, Balance Sheet and Security Commission Reporting, and Initial Public Offering Location

2018 ◽  
Vol 33 (2) ◽  
pp. 35-42
Author(s):  
Natalie Tatiana Churyk ◽  
Alan Reinstein ◽  
Lance Smith
Keyword(s):  
Real Estate ◽  
Initial Public Offering ◽  
Financial Reporting ◽  
Balance Sheet ◽  
Accounting Students ◽  
Real Estate Investment ◽  
Generally Accepted Accounting Principles ◽  
Balance Sheets ◽  
Advantages And Disadvantages ◽  
Public Offering

ABSTRACT Based on a Big 4 real estate audit partner's client, this case introduces graduate research and advanced financial accounting students to acquisition accounting under U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), provides a perspective on real estate investment trusts (REITs), and requires analyzing a U.S. versus Canadian (Ontario) initial public offering (IPO). Students list U.S. and Canadian advantages and disadvantages of REITs, record a portfolio purchase, prepare U.S. GAAP and IFRS balance sheets in order to grasp major REIT reporting differences, contrast the key provisions between U.S. and Canadian (Ontario) securities commissions' IPO reporting, and consider ongoing securities commissions' reporting options. Finally, students will recommend whether the IPO should be issued in the U.S. or Canada. Completing the case helps students: (1) grasp U.S. GAAP and IFRS acquisition accounting methods and different REIT presentations; and (2) recognize that the country selected for the IPO depends upon the issuer's circumstances and preferences.

Do Small Firms Benefit from Auditor Attestation of Internal Control Effectiveness?

2012 ◽  
Vol 31 (4) ◽  
pp. 115-137 ◽  
Author(s):  
Gopal V. Krishnan ◽  
Wei Yu
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Small Firms ◽  
Securities And Exchange Commission ◽  
Control Effectiveness

SUMMARY While auditor attestation of the effectiveness of internal control over financial reporting (ICFR) is required for firms with a public float of at least $75 million (accelerated filers), the Securities and Exchange Commission (SEC) has delayed auditor attestation for non-accelerated filers several times. The Dodd-Frank Act of 2010 exempts non-accelerated filers from auditor attestation. We examine the relation between auditor attestation and revenue quality for a sample of non-accelerated filers and small accelerated filers. We find that discretionary (abnormal) revenues, our proxy for revenue quality, are lower by about 1.5 percent of total assets for accelerated filers relative to non-accelerated filers. This finding holds even among firms whose management has certified their ICFR to be effective. Overall, the findings support the notion that auditor attestation of the effectiveness of ICFR benefits small accelerated filers via higher revenue quality. We believe our findings are timely and potentially informative to regulators, investors, and others.

scholarly journals IPO Underpricing After the 2008 Financial Crisis: A Study of the Chinese Stock Markets

2018 ◽  
Vol 10 (8) ◽  
pp. 2844 ◽  
Author(s):  
Rui Li ◽  
Wei Liu ◽  
Yong Liu ◽  
Sang-Bing Tsai
Keyword(s):  
Financial Crisis ◽  
Initial Public Offering ◽  
Small Firms ◽  
Effective Means ◽  
Ipo Underpricing ◽  
2008 Financial Crisis ◽  
Before And After ◽  
The Difference ◽  
The 2008 Financial Crisis ◽  
Public Offering

A firm’s capability of raising funding is closely related to its sustainable development. With a more efficient allocation of funding among the whole society, social resources will be better utilized. Initial Public Offering (IPO) can indeed be an effective means of raising capital for corporate ventures. Using 1069 firms which completed IPOs on Chinese stock exchanges between 1st January 2004 and 1st January 2013, we investigate the difference in IPO underpricing before and after the 2008 financial crisis. Based on OLS regression models, we find that the IPOs are less underpriced in the post-crisis period. We examine the moderating effects of firm size on the difference in IPO underpricing between pre- and post-crisis periods, finding that small firms experienced less IPO underpricing than large firms after the financial crisis. After applying different model specifications such as Robust and OProbit regressions, the results remain consistent. Our study contributes to understanding the dynamics and influences of the financial crisis on firms’ IPO cost from the perspective of information asymmetry.

The Hole in the Doughnut: Accounting for Acquired Intangibles at Krispy Kreme

2006 ◽  
Vol 21 (3) ◽  
pp. 297-312 ◽  
Author(s):  
Lori Holder-Webb ◽  
Mark Kohlbeck
Keyword(s):  
Executive Compensation ◽  
Initial Public Offering ◽  
Financial Reporting ◽  
Real World ◽  
Intangible Assets ◽  
Purchase Price ◽  
Real World Setting ◽  
Exit Costs ◽  
Accounting Courses ◽  
Public Offering

Krispy Kreme Doughnuts, Inc. used a 2000 initial public offering (IPO) to embark on an active expansion and franchise reacquisition program. This case focuses on this high-visibility franchise reacquisition program and several associated and highly controversial accounting issues, and provides an opportunity to examine numerous technical and conceptual issues in a real-world setting. In the case, you will encounter a variety of financial reporting issues—from identification and valuation of uncommon intangible assets in Part 1, to acquisition accounting, purchase-price allocations, contingent consideration, exit costs, executive compensation, and loan impairments in Part 2. The case is appropriate for use in intermediate and advanced accounting courses.

Auditor Attestation under SOX Section 404 and Earnings Informativeness

2012 ◽  
Vol 32 (1) ◽  
pp. 61-84 ◽  
Author(s):  
Lucy Huajing Chen ◽  
Jayanthi Krishnan ◽  
Heibatollah Sami ◽  
Haiyan Zhou
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Control Sample ◽  
Audit Fees ◽  
Test Sample ◽  
Section 404 ◽  
Earnings Informativeness ◽  
Sarbanes Oxley ◽  
Audit Reports ◽  
Section 302

SUMMARY Section 404 of the Sarbanes-Oxley Act requires managers to assess, and their auditors to express an opinion on, the effectiveness of internal controls over financial reporting (ICFR). Policymakers expect the ICFR audits to enhance the credibility of firms' financial statements. Prior research argues that audit characteristics that enhance the credibility of financial reporting are associated with stronger earnings-return associations. We examine whether earnings accompanied by the first-time Section 404 ICFR reports were associated with higher informativeness compared with earnings in the prior year when only financial statement audit reports were available. We conduct our analysis for a test sample of accelerated filers with clean ICFR reports and clean previous Section 302 disclosures. Using a difference-in-differences approach, we compare the change in earnings informativeness for the test sample with that for a control sample of non-accelerated filers. We find that earnings informativeness for companies with clean internal control reports was greater in the Section 404 adoption year than in the previous year, while there was no change in earnings informativeness for the non-accelerated filers. Also, there is no difference in the increase in earnings informativeness across firms with small and large compliance costs (measured by change in audit fees), suggesting that both groups benefited from the Section 404 ICFR audits.

U.S. Big 4 and Local Auditors in the China Initial Public Offering Market

2019 ◽  
Vol 22 (04) ◽  
pp. 1950024 ◽  
Author(s):  
Zhi-Yuan Feng ◽  
Hua-Wei Huang ◽  
Mai Dao
Keyword(s):  
Initial Public Offering ◽  
Audit Quality ◽  
Audit Fees ◽  
Agency Conflicts ◽  
Accounting Firms ◽  
Corporate Fraud ◽  
Big 4 ◽  
Investment Distortions ◽  
Ipo Pricing ◽  
Public Offering

This paper examines (1) whether auditor type affects initial public offering (IPO) pricing; (2) whether the effect of IPO pricing is different for clients with different ownership structures. We find that (1) firms being audited by Big 4 accounting firms receive IPO premium while others being audited by local accounting firms do not; (2) Big 4 auditors receive higher audit fees than China’s Top 10 or small local auditors. This paper extends the prior research (e.g., Kumar, P and N Langberg (2009). Corporate fraud and investment distortions in efficient capital markets. The RAND Journal of Economics, 40, 144–172) that reduces agency conflicts between shareholders and manager (by means of better audit quality) and also reconciles corporate misreporting and investment distortions.

scholarly journals Does Control Self-Assessment Influence Financial Reporting Quality?

2020 ◽  
Vol 5 (4) ◽  
pp. 70-76
Author(s):  
Hiroshi Uemura
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Negative Relationship ◽  
Reporting Quality ◽  
Audit Fees ◽  
Internal Controls ◽  
Financial Reporting Quality ◽  
Control Environment ◽  
Self Assessment ◽  
Positive Effects

The aim of this study is to examine the effect of control self-assessment (CSA) on financial reporting quality by using CSA as a proxy of monitoring quality. CSA has an important feature that allows the employees themselves to become involved in the assessment of internal controls’ effectiveness. Moreover, CSA has two important monitoring functions. First, it can add value to internal auditing. Second, because all employees of operational units participate in the assessment of internal controls in CSA, that control environment is expected to be mature. The investigation of this study used data from 3,517 Japanese firms listed on the First Section, Second Section, Mothers, and JASDAQ of the Tokyo Stock Exchange. The result of 2SLS regression shows that CSA adoption has a negative relationship with the number of financial restatements and audit fees, and therefore, I conclude that CSA has positive consequences for financial reporting quality. This result indicates that the internal monitoring mechanism that continuously monitors internal control over financial reporting (ICFR) effectiveness and in which all employees participate has some positive effects on financial reporting quality. There are two reasons for this result. First, employees have easier access to negative information concerning ICFR effectiveness than outsiders and can share that information with the internal personnel in charge of monitoring (e.g., internal auditors). Moreover, CSA is expected raise an entity’s awareness of ICFR, that is, the control environment of ICFR components is made into an environment that prevents and detects impropriety in the accounting process. Keywords: Control

SOX Section 404 Material Weakness Disclosures and Audit Fees

2006 ◽  
Vol 25 (1) ◽  
pp. 99-114 ◽  
Author(s):  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Fees ◽  
Internal Controls ◽  
Fiscal Year ◽  
Section 404 ◽  
Control Material ◽  
Material Weakness ◽  
Sarbanes Oxley ◽  
The Mean

Section 404 of the Sarbanes-Oxley Act and Auditing Standard No. 2 (PCAOB 2004) require management and the auditor to report on internal controls over financial reporting. Section 404 is arguably the most controversial element of SOX, and much of the debate around the costs of implementing section 404 has focused on auditors' fees (Ernst & Young 2005). In this paper, we examine the association between audit fees and internal control disclosures made pursuant to section 404. Our sample includes 660 manufacturing firms that have a December 31, 2004 fiscal year-end and filed the section 404 report by May 15, 2005. We find that the mean (median) audit fees for the firms in our sample for fiscal 2004 is 86 (128) percent higher than the corresponding fees for fiscal 2003. Audit fees for fiscal 2004 are 43 percent higher for clients with a material weakness disclosure compared to clients without such disclosure; however, audit fees for fiscal 2003 are not associated with an internal control material weakness disclosure (in the 10-K filed following fiscal 2004). We also find that the association between audit fees and the presence of a material weakness disclosure does not vary depending on the type of material weakness (systemic or non-systemic).

Do abnormal IPO audit fees signal IPO audit quality and post-IPO performance? A principal-agent analysis based on evidence from China.

2020 ◽  
Author(s):  
K. Hung Chan ◽  
Phyllis L. L. Mo ◽  
Weiyin Zhang
Keyword(s):  
Financial Performance ◽  
Agency Theory ◽  
Initial Public Offering ◽  
Audit Quality ◽  
Financial Statements ◽  
Audit Fees ◽  
Main Interest ◽  
Ipo Performance ◽  
Market Participants ◽  
Public Offering

We assess the unexplained information content of abnormal audit fees using a sample of initial public offering (IPO) audits in China. We find that abnormal IPO audit fees are positively associated with manipulation of pre-IPO real activities, suggesting lower audit quality for IPO financial statements. We further find that abnormal IPO audit fees are negatively associated with post-IPO financial performance. These results suggest a strong alignment of interests between the principal (pre-IPO shareholders), whose main interest is to gain listing status, and its agent (the auditor), who is willing to cooperate with the principal for extra economic rents (abnormal audit fees). Our findings that abnormal IPO audit fees are associated with lower audit quality and can help predict post-IPO financial performance have important implications for audit regulators, IPO market participants, and the applicability of agency theory in the context of IPO audits.

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