Nonaudit Fees, Auditor Independence, and Bond Ratings

2004 ◽  
Vol 23 (2) ◽  
pp. 89-103 ◽  
Author(s):  
Duane M. Brandon ◽  
Aaron D. Crabtree ◽  
John J. Maher
Keyword(s):  
Classification Accuracy ◽  
Economic Effect ◽  
Auditor Independence ◽  
Bond Market ◽  
Bond Ratings ◽  
Bond Rating ◽  
External Auditors ◽  
The Public ◽  
Accounting Scandals ◽  
Nonaudit Services

Recent accounting scandals and perceived audit failures have resulted in excessive criticism of the accounting and auditing professions. The financial press has expressed disdain at the presumably substandard work that was completed on audit clients, ostensibly at the expense of the public good. Our research investigates one aspect of this situation by exploring the effects that nonaudit services performed by a firm's external auditors have on perceived auditor independence in the bond market. Specifically, we analyze the effects that the magnitude and relative degree of nonaudit services have on the bond rating process. Regression results indicate that the amount of nonaudit services provided by a firm's external auditors is negatively associated with that client's bond rating. However, results of classification accuracy analyses fail to demonstrate any improvement in performance as a consequence of adding nonaudit fees to a benchmark prediction model, indicating no economic effect on the actual bond ratings. These results afford insights concerning bond rating analysts' perceptions of auditor independence and provide empirical evidence regarding the role that audit and nonaudit service fees play in establishing a firm's bond rating.

scholarly journals The impact of the supervisory board on bond ratings of non-financial companies

2020 ◽  
Vol 17 (1) ◽  
pp. 15-23
Author(s):  
Zainal Abidin Sahabuddin ◽  
Bram Hadianto
Keyword(s):  
Audit Committee ◽  
Control Variable ◽  
Supervisory Board ◽  
Bond Market ◽  
Probit Regression ◽  
Board Size ◽  
Bond Ratings ◽  
Bond Rating ◽  
High Bond ◽  
The Impact

Issuing bonds is one of the alternative ways for non-financial companies to get money from the public besides borrowing money from banks. Compared with getting money banks, obtaining money from the bond market is slightly economical because the companies are not essential to borne the intermediation cost anymore. As a consequence, the companies in the bond market will get the assessment from the appointed agency. Furthermore, the rating of bonds will determine their reputation. Mentioning the literature review, the bond ratings are affected by the features of the supervisory board: size, independence, and audit committee. Therefore, this research intends to attain two goals. Firstly, it aims to prove and analyze the impact of the supervisory board size and independence, as well as the audit committee size on the company’s possibility to get a high bond rating with profitability as the control variable. Secondly, it intends to know the accuracy rate of grouping the company bond ratings through the classification matrix.The population originates from the non-financial companies. The total samples are determined by the Slovin formula with a boundary of the fault of 10%. Based on this formula, the total samples are 36 companies. Furthermore, they are randomly grabbed from the population. The ordered probit regression model and the classification matrix are utilized to analyze the data. Based on the data analysis, this research finds out that the supervisory board size and independence, the audit committee size, and profitability positively affect the bond ratings. It means that the number of the commissioner board and the members of the audit committee have to be added until achieving the maximum level to monitor the performance of the directors so that the company can reach a high bond rating. To sum up, board governance is effective in improving the company’s bond rating.

Data-Driven Green Bond Ratings as a Market Catalyst

2019 ◽  
Keyword(s):  
Bond Market ◽  
Environmental Benefits ◽  
Data Driven ◽  
Rating Systems ◽  
Bond Ratings ◽  
Bond Rating

The authors diagnose the lack of premiums in the green bond market as a result of the inability to differentiate net environmental benefits among bonds. They emphasize data-driven bond ratings as the solution to grow the market. Next, they present an idealized rating framework and contrast currently proposed green bond rating systems from major firms.

Nonaudit Services and Independence in Appearance: Decision Context Matters

2011 ◽  
Vol 23 (2) ◽  
pp. 51-67 ◽  
Author(s):  
Bryan K. Church ◽  
Ping Zhang
Keyword(s):  
Auditor Independence ◽  
Decision Context ◽  
Accounting Scandals ◽  
Asset Value ◽  
Nonaudit Services ◽  
Daunting Challenge ◽  
Independence In Appearance ◽  
Large Decline

ABSTRACT This paper reports the results of two experiments designed to examine users' assessment of the provision of nonaudit services (NAS) on auditor independence. By design, each experiment includes a different decision context. In the first experiment, users witness a large decline in asset value and decide whether to sue the auditor in an effort to recoup losses (as often occurs with accounting scandals). In the second experiment, users assess asset value, which offers a more mundane context. We contend that decision context influences users' motives, such that the auditor's provision of NAS is interpreted opportunistically. Indeed, we find that decision context dramatically affects users' perceptions. Our findings have implications for regulators, who face the daunting challenge of mandating rules/laws to ensure auditor independence. The task becomes more difficult when users' assessment of auditor independence is malleable, varying across decision contexts.

User Primacy, Positive Accounting Theory, and Nonaudit Services: Evidence from the SEC's Independence Hearings

2003 ◽  
Vol 3 (1) ◽  
pp. 36-57 ◽  
Author(s):  
John M. Thornton
Keyword(s):  
Theoretical Model ◽  
Public Interest ◽  
Financial Statements ◽  
Auditor Independence ◽  
Professional Service ◽  
Ethical Egoism ◽  
The Public ◽  
Nonaudit Services ◽  
Accounting Theory ◽  
Positive Accounting Theory

An analysis of the testimony given before the Securities and Exchange Commission (SEC) on auditors' independence requirements indicates that users of financial statements generally favored increased restrictions on the scope of nonaudit services provided by external auditors to their audit clients, while corporate management and public accounting (professional service) firms providing nonaudit services did not. Moreover, users of the financial statements generally favored the more extensive ban on nonaudit services over the SEC's proposed list of proscriptions. The principle of user primacy, a principle that has been espoused by regulatory and accounting standard-setting bodies, holds that the interests of the users of financial reports take precedence over the interests of the report preparers. However, the SEC's final ruling on auditor independence requirements was more closely aligned with the position taken by the preparers. An analysis of the arguments presented in the transcripts and the regulations promulgated suggests that positive accounting theory predicated on instrumental economic and political power better explains the SEC's behavior than do considerations relative to the public interest reflected in the principle of user primacy. Positive accounting theory provides the theoretical model for the empirical research supporting nonregulation of nonaudit services and represents a theoretical model that explains the actions of the SEC as reflected in the final ruling on auditor independence requirements. Further, while positive accounting theory represents the underlying dogma upon which rhetorical arguments against increased regulation are grounded, the arguments themselves are framed and justified using the rhetoric of user primacy, which suggests either a nai¨ve belief in the ultimate generalized good of the neoclassical assumption of instrumental, self-interested behavior (ethical egoism), or a juxtaposition of incompatible theoretical frameworks. The discussion and analysis suggests, and subsequent events seem to confirm, the incompatibility of the two perspectives and, thus, the inability of positive accounting theory-based arguments to provide adequate grounds for acting in the public interest. The principle of user primacy affords legitimate grounds for evaluating regulatory alternatives and should provide the theoretical and empirical basis upon which to evaluate regulatory proposals.

A Proposed Framework Emphasizing Auditor Reliability over Auditor Independence

2003 ◽  
Vol 17 (3) ◽  
pp. 257-266 ◽  
Author(s):  
Mark H. Taylor ◽  
F. Todd DeZoort ◽  
Edward Munn ◽  
Martha Wetterhall Thomas
Keyword(s):  
Public Interest ◽  
Auditor Independence ◽  
Public Confidence ◽  
Sufficient Condition ◽  
Necessary And Sufficient Condition ◽  
Accounting Profession ◽  
The Public ◽  
Necessary And Sufficient

This paper introduces an auditor reliability framework that repositions the role of auditor independence in the accounting profession. The framework is motivated in part by widespread confusion about independence and the auditing profession's continuing problems with managing independence and inspiring public confidence. We use philosophical, theoretical, and professional arguments to argue that the public interest will be best served by reprioritizing professional and ethical objectives to establish reliability in fact and appearance as the cornerstone of the profession, rather than relationship-based independence in fact and appearance. This revised framework requires three foundation elements to control subjectivity in auditors' judgments and decisions: independence, integrity, and expertise. Each element is a necessary but not sufficient condition for maximizing objectivity. Objectivity, in turn, is a necessary and sufficient condition for achieving and maintaining reliability in fact and appearance.

Do Investors' Perceptions Vary with Types of Nonaudit Fees? Evidence from Auditor Ratification Voting

2005 ◽  
Vol 24 (2) ◽  
pp. 9-25 ◽  
Author(s):  
Suchismita Mishra ◽  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Empirical Support ◽  
Positive Association ◽  
Auditor Independence ◽  
The Other ◽  
Audit Committees ◽  
Single Measure ◽  
Nonaudit Services ◽  
Recent Initiative

In FRR No. 68, the SEC (2003b) updated the rules related to the disclosure of fees paid to the independent auditor by requiring more detailed information about nonaudit fees. The SEC (2002, 2003b) asserted that the partition of nonaudit fees into the categories of audit-related, tax, and other fees would be useful for investors in assessing the auditor's independence and in voting on ratifying the auditor. The SEC suggested that investors would view audit-related and tax services more favorably than “other” nonaudit services. In this paper we test the SEC's assertions by examining shareholder ratification votes, during 2003, at 248 of the S&P 1500 firms. Our results support the SEC's assertion that investors would view audit-related fees differently than the other two types of nonaudit fees. However, contrary to the SEC's assertion, both the tax fee ratio and the other fee ratio have a positive association with the proportion of votes against auditor ratification. The results related to tax fees provide empirical support to the PCAOB's recent initiative to examine the association between tax services and auditor independence. Our results can be useful for client managements and audit committees considering purchases of nonaudit services from auditors. Our findings also suggest that it may be useful to replicate some prior studies (that use a single measure of nonaudit fees) using the newer, more finely partitioned, fee data.

The Philosophy and Rhetoric of Auditor Independence Concepts

2004 ◽  
Vol 14 (3) ◽  
pp. 355-376 ◽  
Author(s):  
Sara Ann Reiter ◽  
Paul F. Williams
Keyword(s):  
Collective Responsibility ◽  
Auditor Independence ◽  
Early Years ◽  
Moral Foundation ◽  
Corporate Scandals ◽  
Economic Man ◽  
Accounting Scandals ◽  
Relational Concepts ◽  
American Society

Abstract:This paper analyzes the rhetoric surrounding the profession’s presentations of auditor independence. We trace the evolution of the character of the auditor from Professional Man in the early years of the twentieth century to the more public and abstract figures of Judicial Man and Economic Man. The changing character of the auditor in the profession’s narratives of legitimation reflects changes in the role of auditing, in the economic environment, and in the values of American society. Economic man is a self-interested and shallow character who offered the auditing profession little protection against involvement in corporate scandals. In the wake of recent accounting scandals, the profession is calling for a return to the character of Professional Man to restore trust in audits and the financial markets.We also analyze the philosophical bases of the metaphors surrounding auditor independence. These metaphors, particularly the metaphor of independence as separation, create problems in conceptualizing independence concepts. How can you discuss appropriate relationships when your basic concept is one of separation, or no relationship? On the other hand, relational concepts of independence are also flawed if they are not based on a firm moral foundation. We suggest how the profession can act to rebuild its moral foundation through recognition of collective responsibility.

Proximity to broad bond rating change and CEO power

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Akhilesh Bajaj ◽  
Li Sun
Keyword(s):  
Corporate Governance ◽  
Personal Characteristics ◽  
Chief Executive ◽  
Negative Consequences ◽  
Ceo Power ◽  
Bond Ratings ◽  
Rating Data ◽  
Bond Rating ◽  
Content Type ◽  
Rating Change

PurposeBorderline firms whose bond rating has a plus or minus specification by a rating agency face a greater potential for an upgrade or downgrade by the agency. The authors examine the level of chief executive officer (CEO) power in firms with a plus or minus bond rating. The authors test whether CEOs of these firms become more or less powerful, along with the effect of corporate governance and existing bond rating.Design/methodology/approachThe authors use a panel sample with 16,429 observations from 1992 to 2016 from the ExecuComp database.FindingsThe authors find that CEOs of borderline-rated firms tend to be less powerful, relative to firms with a non-proximate rating. This result is largely present in firms with a plus rating. The authors also find that our primary findings are mainly driven by firms with low bond ratings (i.e. below investment grade) or by firms with weak corporate governance. Lastly, the authors document that CEO personal characteristics (i.e. CEO age, gender and tenure) impact our findings.Research limitations/implicationsFirst, firms in our sample are large public companies, and the external validity of our results to smaller firms that may also be private is unknown. Second, the Compustat database discontinued reporting bond rating data (i.e. S&P bond ratings) in 2017. Hence, the authors are unable to analyze the CEO power of borderline firms in years after 2016.Practical implicationsThe study contributes to the larger debate on whether having powerful CEOs is beneficial to an organization or not, because prior research has examined the consequences of CEO power with mixed results. The authors document evidence to support the research stream that links CEO power to negative consequences.Social implicationsThe authors find that our primary results are enhanced in firms with weak corporate governance, which is consistent with prior research that finds effective governance may mitigate CEO power and agency problems between the CEO and the Board.Originality/valuePrior research primarily uses CEO power as a driver for performance. Our study focuses on CEO power as a dependent variable, with the bond rating change proximity as a driver of CEO power. The authors believe that this helps develop a more comprehensive understanding of CEO power.

PROSPECTS FOR THE DEVELOPMENT OF THE OVDP MARKET IN UKRAINE AS AN ALTERNATIVES TO EXTERNAL BORROWING

2017 ◽  
Author(s):  
Oleksandra Vіvchar ◽  
◽  
Solomiia Papirnyk ◽  
Keyword(s):  
Public Debt ◽  
Bond Market ◽  
Debt Management ◽  
Securities Market ◽  
Government Bond ◽  
Government Bonds ◽  
The Public ◽  
Long Run ◽  
External Borrowing ◽  
Domestic Economies

The article provides an applied analysis of Ukraine's public debt, in particular in the context of the feasibility of optimizing its structure. The comparison of internal and external borrowings is made, the main shortcomings and advantages of each of these ways of mobilization of financial resources are revealed. Given the hypothesis of the need to increase domestic public debt compared to external, special attention is paid to the study of the main financial instrument through which the state raises funds in the domestic market - domestic government bonds of Ukraine. The dynamics of data volumes of debt securities with an emphasis on crisis periods in both the world and domestic economies was also studied. In addition, the structure of domestic government bonds of Ukraine in circulation was considered on the basis of the owner. This made it possible to identify the main players in the domestic government bond market, as well as the motives that motivate them to increase their own portfolio of domestic government bonds of Ukraine. In order to determine the prospects for increasing the volume of output of these instruments of the Ukrainian stock market, their comparative analysis with alternative types of investments. Particular attention in this aspect is paid to the comparison of IGLBs with deposits, which today are considered the simplest, clearest and most proven way to invest money for individuals. An important role in this study is given to the analysis of key problems of the domestic government bond market, which have haunted the domestic economy since the independence of Ukraine. The main successes achieved in recent years by the Public Debt Management Office of Ukraine with the support of representatives of international financial organizations in terms of optimizing the domestic securities market are presented. The main steps that need to be taken for further real transformation of the debt securities market in Ukraine and which in the long run will reduce Ukraine's financial dependence on external creditors, in particular their requirements in the political and economic arena, are also outlined.

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